When someone dies, often there is a person named as the executor of their estate. Being named the executor of (or the personal representative to) someone’s estate is a serious matter, and one has to be responsible with each of the assets in the dead person’s estate. Usually, being named an executor (if you are a man, or an executrix if you are a lady) is not a surprise; usually one is named and accepts the role, long before the time of the passing of the person who died. Usually, executor paperwork is notarized. While you might earn and receive a fee or other compensation for being the executor and handling the estate, the assets and money in the estate is not yours. If you spend or use any assets in the estate, without first getting written permission from everyone named as a beneficiary in the estate and the court documents, you can expect serious legal trouble, including the possibility of jail time; so do not have a party with any funds that are not yours.
While some executors must post bonds, if you are well-known and trusted, being named and acting as an executor to an estate will not require you to post a bond. Subject to a judge’s order, you can be paid from the deceased’s estate. Being an executor has many responsibilities including securing all assets of the deceased, determining who are the heirs, and paying the debts of the estate, including court judgments. As an executor, make sure you comply with all laws, whatever the judge orders, and the specific instructions detailed in the decedent’s will or other estate plan directions. Do not ignore a judge’s or a court’s order.
Stay polite to everyone, especially in court. Sometimes relatives may want something that belonged to the deceased. Some relatives may claim they are entitled to an asset, contrary to what was specified in the will or estate plan. Anything with actual or imagined significant value should be transferred out of the estate, only after first getting the permission of the court and all the heirs. Expensive assets might have to be sold at an auction. The deceased’s property must be protected until it is sold or transferred. Unless the estate is simple, consider retaining a probate attorney to help you do things correctly, and meet the obligations owed to all parties. Figuring out who is a qualified and legitimate heir might require an attorney’s help; because sometimes previously unknown potential relatives might appear and want a payment in large estate situations. Being an executor to an estate is not easy, however the reward knows you helped to complete the final wishes of the deceased.
Estate taxes are imposed by the federal government and some state governments on the transfer of a person’s property upon death. Estate taxes can apply when the decedent has an estate plan such as a will in place, and they can also apply if the decedent dies intestate (meaning without a will or other form of estate plan). A number of states have passed laws requiring the recipients of real estate or personal property to pay taxes on the property that’s being inherited. Although these taxes focus on recipients, rather than on the decedent, they are nonetheless considered a form of estate tax. This section contains information and resources on estate taxes as they relate to estate planning and administration. For example, you’ll find a discussion about how to minimize the estate taxes a person pays, an article explaining gift tax laws, an overview of using life insurance to avoid estate taxes, and a link for consulting with an experienced estate planning attorney in your area.
Arguments For and Against Estate Taxes
Philosophically, some estate tax opponents question why property that belonged to you during life, and which presumably has already been taxed at the time of purchase, should again be taxed when you pass away. Estate tax opponents also ask why property that is obtained through a person’s efforts and hard work during life should be taxed simply because he or she passes away. On the other hand, supporters of estate taxes argue that these taxes help to reduce economic inequality, and that the revenue they generate help governments at various levels to pay for necessary public services.
The Basics of Estate Taxes
Note that some forms of estate tax are imposed directly on the decedent’s estate, while others focus on the recipients of the property. For example, in some states, estate taxes are imposed upon a person who receives property from the decedent, and the amount imposed can depend on both the value of the property being transferred and on the recipient’s relationship to the decedent. As you begin to plan your estate, it’s important for you to know the basics about the federal and your state’s estate taxes, so that you make decisions that minimize the amount of tax that’s paid either by your estate or by your inheritors. Depending on the purpose or type of estate plan you create, you may be able to transfer money and other property while avoiding taxes such as the gift tax. For example, one type of estate plan allows a person to create an account dedicated to providing school tuition to another person. This type of account generally avoids gift taxes.
Ways to Reduce Estate Taxes
The Federal estate tax can be reduced through various legitimate estate planning techniques. Following is a list of ten methods you should think about as ways to reduce your estate taxes.
• Marital Transfers: Except where a spouse is a noncitizen, neither lifetime gifts nor bequests at death to one’s spouse are subject to estate taxes. However, the estate of the spouse will have to pay estate taxes on the spouse’s entire taxable estate, including the amount transferred to the spouse pursuant to the lifetime transfer, at the spouse’s death. Accordingly, this tool merely defers estate taxes; it does not entirely eliminate them.
• Lifetime Gifts To Children And Grandchildren: Each person can make annual gifts of $12,000 to any number of persons, typically children or grandchildren, without incurring a gift tax. If both spouses engage in gifting, they can collectively give away $24,000 per year per recipient without incurring a gift tax. Over a period of several years the amount of money that can be transferred to a couple’s intended beneficiaries under this method is substantial, thereby reducing the size of the taxable estate.
• Uniform Transfer To Minors: This is a form of gifting used where the children are still minors. The gift is given to a custodian for the benefit of the child, and is distributed to the child when he/she reaches the age of majority. As with other gifts, the annual exclusion for lifetime gifts is used under this approach.
• Ab Trusts And Qtip Trusts: For 2010 through 2020, each person is currently scheduled to have the first $2 million of his/her estate pass to his/her heirs without estate taxes. This is referred to as the “unified credit” or “personal exemption.” An AB Trust is a trust designed to make sure the unified credit of each spouse is used to the full extent possible, while allowing the surviving spouse to have the use of the assets of the deceased spouse during the remainder of the surviving spouse’s lifetime. A QTIP Trust permits a spouse to transfer assets to his/her trust while still maintaining control over the ultimate disposition of those assets at the spouse’s death. QTIP Trusts are particularly popular in situations where a person is married for a second time but has children from a first marriage for whom he/she would like to reserve assets.
• Irrevocable Life Insurance Trusts: By transferring small amounts of the estate (equal to the amount of a life insurance premium) to an irrevocable life insurance trust, a person can reduce the size of his or her taxable estate while creating a much larger asset (the life insurance proceeds) outside of the estate. The life insurance proceeds are generally not taxable.
• Family Limited Partnership: The family limited partnership provides a valuable estate planning tool to assist families in transferring ownership of family-owned closely held businesses to the next generation, and in protecting family assets from creditors. It also permits taxation of partnership income at the children’s lower tax rates. Additional attractive features of the family limited partnership are flexibility and revocability.
• Private Annuity: A private annuity is a sale of an asset to a younger generation in exchange for an unsecured promise to pay annual amounts to the seller for the seller’s lifetime. The sold asset is thus removed from the seller’s estate, although the amounts of the payments to the seller (unless spent) will be part of the seller’s estate.
• Qualified Family-Owned Business Interest (QFOBI): The Internal Revenue Code permits a “qualified family-owned business interest” to be deducted from a gross estate. To qualify for the deduction, the following requirements must be met:
• The decedent or family members must have owned and participated in the business for at least five of the last eight years
• The business interest must make up at least 50 percent of the decedent’s adjusted gross estate
• The decedent and his/her family must have owned 50 percent of the business
• The decedent must have been Santa Clara Utah citizen or resident
• The business must be located in the Santa Clara Utah
• Special Use Real Estate Valuation: For federal estate tax purposes, real estate is usually valued at its “highest and best use” value. This can sometimes produce unfair results, such as where a family farm is located adjacent to more valuable commercial real estate. To address this unfairness, the Internal Revenue Code permits certain real estate to be valued at its “actual use” rather than its “highest and best use.”
• Charitable Transfers: Lifetime charitable transfers or gifts to charities upon death can reduce the size of the estate and thereby reduce estate taxes. Lifetime gifts provide the added benefit of an income tax deduction. Gifts can also be made in a manner that lets the donor retain the right to use the gifted asset or income there from until death.
There are a few ways that you could potentially avoid the estate tax, or lessen your estate tax liability. Here are some of the most popular options:
1. Giving Tax-Free Gifts. You are allowed to give up to $14,000 per calendar year (for tax years 2018-2021), per recipient without having to pay gift tax. In addition to giving gifts of property or cash, you can also give a tax-free gift in the form of paying someone’s tuition or medical bills. By giving away property in a way that is free from taxes, you can reduce the size of your estate and possibly get it under the cutoff limit.
2. Setup an AB Trust. An AB trust is a trust where a married couple decides to set up a trust for the benefit of their children once both spouses pass away. However, if one spouse dies before the other, the surviving spouse has the right to use the trust for the remainder of his or her life. Setting up your finances in this manner can cut your taxable estate in half.
3. Setup a “QTIP” Trust. A QTIP trust allows you to postpone the collection of estate taxes until the surviving spouse dies. This could potentially lead to a lowered estate taxes, or none at all, depending on what Congress does with the federal estate tax laws.
4. Give to Charitable Trusts. This involves giving substantially to a tax-exempt charity.
5. Setup a Life Insurance Trust. This allows you to take the value of your life insurance proceeds out of your taxable estate.
Generally speaking, you probably cannot give away all your property before you die. Under current federal laws, you can only give away up to $14,000 per calendar year, per recipient (a person or a non-charitable trust). If you give away more than this limit, that gift will have a federal gift tax imposed on it. This gift tax applies at the same time the estate tax is imposed. However, if you can give away several $14,000 gifts every year, you can substantially reduce your estate. For example, if you give away $14,000 to each of your 30 relatives each year for the 5 years before you die, you will have reduced your estate by a whopping $2,100,000.
However, there are some gifts that are completely exempt from the federal gift and estate taxes. For example, if you are married and your spouse is Santa Clara Utah citizen, you are free to give an unlimited amount of property each year, all free from the gift tax. In addition, you are allowed to give substantially to tax-exempt charities. The same is true if the gift is in the form of paying tuition (not room and board or other expenses related to schooling) or someone’s medical bills.
Are There Any States That Have Their Own Estate Taxes?
Yes. In addition to the federal estate tax, there are some situations in which a state will impose an estate tax even if your estate is not large enough to be taxed by the federal government.
• State Estate Taxes — Up until recently, states did not normally impose their own estate taxes. Instead, the states used to take part of the federally imposed taxes. However, states are no longer permitted to get a share of federal estate taxes, so some states have taken it upon themselves to impose their own. It sometimes happens that some state laws impose estate taxes on estates that are not large enough to have the federal tax imposed.
• State Inheritance Taxes — There are other states that impose an inheritance tax instead of an estate tax. A state inheritance tax is imposed on a deceased persons’ property that is left to people. The rate of the tax depends on the relation of the deceased person to the person that inherits the property. For example, the rate of inheritance tax on property left to surviving spouses is generally very low, or nothing at all.
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