The estate tax is a tax on a person’s assets after death. In 2020, federal estate tax generally applies to assets over $11.58 million. Estate tax rate ranges from 18% to 40%. Assets spouses inherit generally aren’t subject to estate tax. The estate tax, sometimes called the “death tax,” is a tax levied on the estate of a person who has recently died. It applies to the money and assets in an estate before they are dispersed to a person’s designated heirs. Only estates that reach a legally defined threshold are subject to the estate tax. The inheritance tax is different from the estate tax. The inheritance tax applies to money after it has been passed on to beneficiaries, who are responsible for paying the tax. Utah does not levy an inheritance tax. However, inheritance laws from other states may apply to you if someone from a state with an inheritance tax leaves you something. Utah does not have a gift tax. There is a federal gift tax exclusion of $15,000 per receiver per year. If you gift one person more than $15,000 in a year, you must report it to the IRS. The gift in excess of $15,000 will reduce your lifetime exemption of $11.18 million and your federal estate tax exemption.
Inheritance tax is a tax paid by a person or persons who inherit the estate (money or property) of a deceased person. In some jurisdictions, the terms “estate tax” and “inheritance tax” can be used interchangeably. The inheritance tax is essentially collected from the heirs or beneficiaries of the estate of a deceased person. The tax is payable upon the transfer of the estate to the beneficiaries. In most cases, each heir is responsible for paying their own inheritance tax based on the portion of the estate inherited. The relationship between the deceased person and the beneficiary may impact the necessity to pay the inheritance tax. For instance, spouses are generally excluded from paying the tax. In addition, the entities and organizations that receive the estate as a charitable donation from the deceased person are not required to pay the tax as well. The lineal descendants, and ancestors, including parents, children, siblings, and grandparents, as well as remote relatives and non-relatives, typically must pay the inheritance tax. However, the remote relatives and non-relatives generally face a much higher tax rate as compared to the close relatives. Generally, the tax is imposed based on the value of the estate. In certain scenarios, if the value of the estate is below a predetermined benchmark, it will not be imposed.
Estate planning is the process of designating who will receive your assets and handle your responsibilities after your death or incapacitation. One goal is to ensure beneficiaries receive assets in a way that minimizes estate tax, gift tax, income tax and other taxes. Estate planning can help establish a platform you can fine-tune as your personal and financial situations change.
Steps to Basic Estate Planning
Inventory your stuff: You may think you don’t have enough to justify estate planning. But once you start looking around, you might be surprised by all the tangible and intangible assets you have.
The tangible assets in an estate may include:
• Homes, land or other real estate
• Vehicles including cars, motorcycles or boats
• Collectibles such as coins, art, antiques or trading cards
• Other personal possessions
The intangible assets in an estate may include:
• Checking and savings accounts and certificates of deposit
• Stocks, bonds and mutual funds
• Life insurance policies
• Retirement plans such as workplace 401(k) plans and individual retirement accounts
• Health savings accounts
• Ownership in a business
Once you inventory your tangible and intangible assets, you need to estimate their value. For some assets, outside valuations like these can help:
• Recent appraisals of your home
• Statements from your financial accounts
When you don’t have an outside valuation, value the items based on how you expect your heirs will value them. This can help ensure your possessions are distributed equitably among the people you love.
Account for your family’s needs: Once you have a sense of what’s in your estate, think about how to protect the assets and your family after you’re gone. Name a guardian for your children and a backup guardian, just in case when you write your will. This can help sidestep costly family court fights that could drain your estate’s assets.
Document your wishes for your children’s care: Don’t presume that certain family members will be there or that they share your child-rearing ideas and goals. Don’t assume a judge will abide by your wishes if the issue goes to court.
Establish your directives: A complete estate plan includes important legal directives. A trust might be appropriate. With a living trust, you can designate portions of your estate to go toward certain things while you’re alive. If you become ill or incapacitated, your selected trustee can take over. Upon your death, the trust assets transfer to your designated beneficiaries, bypassing probate, which is the court process that may otherwise distribute your property. A medical care directive, also known as a living will, spells out your wishes for medical care if you become unable to make those decisions yourself. You can also give a trusted person medical power of attorney for your health cares, giving that person the authority to make decisions if you can’t. These two documents are sometimes combined into one, known as an advance health care directive. A durable financial power of attorney allows someone else to manage your financial affairs if you’re medically unable to do so. Your designated agent, as directed in the document, can act on your behalf in legal and financial situations when you can’t. This includes paying your bills and taxes, as well as accessing and managing your assets. A limited power of attorney can be useful if the idea of turning over everything to someone else concerns you. This legal document does just what its name says. It imposes limits on the powers of your named representative. For example, you could grant the person the power to sign the documents on your behalf at the closing of a home sale or to sell a specific stock. Be careful about who you give power of attorney. They may literally have your financial well-being and even your life in their hands. You might want to assign the medical and financial representation to different people, as well as a backup for each in case your primary choice is unavailable when needed.
Review your beneficiaries: Your will and other documents may spell out your wishes, they may not be all-inclusive. Retirement plans and insurance products usually have beneficiary designations that you need to keep track of and update as needed. Those beneficiary designations can outweigh what’s in a will.
Make sure the right people get your stuff: People sometimes forget the beneficiaries they named on policies or accounts established many years ago. If, for example, your ex-spouse is still a beneficiary on your life insurance policy, your current spouse will get the bad news and none of the policies payout after you’re gone.
Don’t leave any beneficiary sections blank: In that case, when an account goes through probate, it may be distributed based on the state’s rules for who gets the property.
Name contingent beneficiaries: These backup beneficiaries are critical if your primary beneficiary dies before you do and you forget to update the primary beneficiary designation.
Note your state’s estate tax laws: Estate planning is often a way to minimize estate and inheritance taxes. But most people won’t pay those taxes. At the federal level, only very large estates are subject to estate taxes. Some states have estate taxes. They may levy estate tax on estates valued below the federal government’s exemption amount. Some states have inheritance taxes. This means that the people who inherit your money may need to taxes on it.
Weigh the value of professional help: Whether you should hire an attorney or estate tax professional to help create your estate plan generally depends on your situation. If your estate is small and your wishes are simple, an online or packaged will-writing program may be sufficient for your needs. These programs typically account for IRS and state-specific requirements and walk you through writing a will using an interview process about your life, finances and bequests. You can even update your homemade will as necessary. If you have doubts about the process, it might be worthwhile to consult an estate attorney and possibly a tax advisor. They can help you determine if you’re on the proper estate planning path, especially if you live in a state with its own estate or inheritance taxes.
Plan to reassess: Revisit your estate plan when your circumstances change, for better or for worse. This may include a marriage or divorce, birth of a child, loss of a loved one, getting a new job or being terminated. Revisit your estate plan periodically even if your circumstances don’t change. Although your situation may be the same, laws may have changed. It will take some effort to revise your plan, but take heart. The need to revise means you’ve already avoided the biggest estate planning mistake: never drafting a plan at all.
The Benefits of Estate Planning
• For the management of an individual’s property in the event of incapacity: In circumstances where a person is unable to manage their properties or finances due to severe illness or unavailability, an estate plan sets helps a person properly determine how their assets should be managed. A power of attorney, personal directives through letters of instruction and trusts can be effective tools for proper estate management.
• For proper distribution of assets: Estate plan is very beneficial for accurate distribution of an individual’s assets. Wills, codicils, deeds of gifts and trusts enables an individual determine how their assets will be distributed to their beneficiaries after their death to prevent disputations in future. Without an estate plan, the court will determine how the assets of a deceased will be distributed.
• For the protection of beneficiaries: An estate plan invariably protects the interest of beneficiaries by ensuring that their shares are properly specified and preserved. If an individual has a child who is a minor, the individual can designate guardians and trustees who will oversee the financial and other needs of the minor. On the other hand, if the individual’s children are adults, but are unable to manage finances or assets, the individual can create a trust to protect the children from making bad decisions.
• For a speedy and efficient transfer of an individual’s assets: The deed of gift and trusts are very speedy and cost effective ways to transfer one’s assets to a beneficiary. Without proper estate plan, the process of transfer of assets may be extremely cumbersome. Estate planning helps an individual to identify cost effective and peaceful way to transfer their asset to their beneficiaries either during their lifetime or after their death.
• To minimize cost and avoid disputes: An estate plan will specify how an individual’s assets will be managed and distributed to beneficiaries thereby leaving no room for speculations and confusion. Hence this will prevent disputations and invariably save time and money.
• To minimize estate taxes: The significant loss of a part of one’s estate to the payment of taxes is a factor that should motivate people to establish an estate plan. Through strategic planning, people can substantially reduce or eliminate taxes by setting up trusts as part of their will, living trusts or bequeathing gifts to their beneficiaries during their lifetime.
It is important to note that not every form of estate plan is suitable for everyone. Each form of estate planning has its distinct and unique features and people’s. If an individual desires a speedy and cost effective process of property transfer, it’s important to consider the various forms of estate plan that will help the individual achieve their desired purpose.
Estate Administration Lawyer
When you need legal help with inheritance, estate, probate, trusts or wills, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506