ESTATE PLANNING


Forces That Affect Your Estate Plan

Everything you own is considered part of your estate when you die. To grasp the importance of planning for the distribution of your worldly goods, consider all the things that influence what happens to them.

1. The role of probate

This is the procedure by which state courts validate a will's authenticity, thereby clearing the way for the executor to collect and pay debts, pay taxes, sell property, distribute funds and carry out other necessary tasks involved with settling an estate. The process can be slow and expensive, and probate fees can absorb 3% to 7% of the estate's assets. And if there is a "will contest," costs will skyrocket.

See Also: The Basics Special Report

Mindful of criticism and the spread of devices designed expressly to keep assets out of the grip of probate courts, most states have adopted a streamlined procedure for small estates, with informal procedures requiring little court supervision. Sometimes all that's necessary is for the appropriate person to file an affidavit with the court and have relevant records, such as title to property, changed. Formal probate, in which major steps along the way are supervised by the court, is commonly reserved for large estates.

Not all of your estate has to go through probate. Among the items exempted from probate -- but not necessarily from taxes -- are life insurance payable to a named beneficiary, property left in certain kinds of trusts and assets such as homes and bank accounts held in joint tenancy with right of survivorship.

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2. Joint ownership

Property jointly owned with a right of survivorship -- the form that is commonly used by married couples but can be employed by any two people -- automatically passes to the other owner when one owner dies. Tenancy by the entirety, another form of joint ownership, can apply only to married couples and isn't recognized in all states. The pluses and minuses of joint ownership are discussed in detail later. For now, suffice it to say that it is an important estate-planning tool.

3. Federal estate and gift taxes

Despite all the attention given to the federal estate tax, few estates ever actually owe it. For 2014, the first $5.34 million of an estate is tax-free (twice that for married couples), so only taxable estates larger than that have to pay the tax, which is a flat rate of 40%.

If your estate is likely to approach or surpass the taxable level, one way to reduce the estate-tax hit is to give away assets before you die. You can give away up to $14,000 a year to as many recipients as you wish without reducing your lifetime exemption. (For married couples, the limit is $28,000 per recipient.)

4. State inheritance taxes

Until 2005, all 50 states and the District of Columbia had an estate tax, too: a so-called pickup tax, which applied only to estates owing the federal tax. The pickup tax didn’t actually increase the amount an estate owed but simply used a tax credit to channel revenue to your state rather than to the federal treasury. In 2005, though, the federal credit disappeared and so did the state’s pickup tax. Currently, the District of Columbia and 14 states (Connecticut, Delaware, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Ohio, Oregon, Rhode Island, Tennessee, Vermont, and Washington) collect an estate tax at the estate level.

Seven states — Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania — also levy an inheritance tax, which is paid by the beneficiary rather than the estate. (And, yes, that means both Maryland and New Jersey collect both an estate tax and an inheritance tax). In all states, transfers of assets to a spouse are exempt from the tax. In some states, transfers to children and close relatives are also exempt. On July 1, 2013, Minnesota added a gift tax of 10% on gifts exceeding an annual exclusion ($14,000 in 2013), with a lifetime exemption of $1 million.

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