Retirement and Estate Planning

Estate Planning isn't just for the Wealthy

If you want to leave more of your assets to your beneficiaries rather than Uncle Sam, it’s wise to start thinking about estate planning and estate taxes as soon as possible. Don’t make the mistake of assuming that estate planning is a task only for the wealthy.

CPAs point out that with more individuals setting aside retirement and other savings earlier in life, they are likely to have larger estates that may potentially be subject to estate taxes. This can be costly: the maximum federal estate tax rate is 40 percent (raised from 35 percent, because of the American Taxpayer Relief Act).

Have a will done if you do not have one yet
The state will determine how your assets are distributed if you do not have a will, and that may not be what you intended. No matter what size your estate is, you should have a will. Have an attorney draft this for you. "Internet" wills and handwritten documents often don't meet state law requirements causing problems for your executor and/or beneficiaries.

Calculate your estate’s net value
Your estate will be required to pay federal estate taxes if your taxable estate exceeds the exemption amount set by Congress. Your taxable estate will be determined by adding up the fair market value of all the property you own at death, including cash, investments, your home and other real estate, business interests, retirement plan assets, as well as death benefits from your life insurance that are paid to your estate because your beneficiary designations are out-of-date.

From its total assets, your estate gets to deduct money owed; for example, your mortgage balance, funeral and burial expenses, money paid to the executor and other professionals for settling the estate, and charitable deductions that are part of your estate settlement. In addition, your estate also gets a “marital deduction” for property passing to your surviving spouse.

Applicable credit amount reduces estate tax bill
A unified credit is allowed against the estate tax. The statutory amount exempted from tax varies by year. For estates of persons dying in 2016, the exemption amount is $5,450,000. For those dying in 2017, the exemption amount increases to $5,490,000.

The unlimited marital deduction
A married taxpayer is allowed to pass an unlimited amount to his or her spouse free of estate tax, though this rule does not apply if the spouse is not a U.S. citizen. The unlimited marital deduction can be a good way to reduce your current estate tax liability, but it may mean a larger estate tax bill in the future because it will increase the estate of the surviving spouse.

If you leave everything to your spouse using the unlimited marital deduction, no federal estate tax will be levied at your death. However, when your spouse dies, the assets of the entire marriage are included in his/her taxable estate.

Consult with a CPA
Like income taxes, estate taxes are a graduated tax. As your estate's value increases, so does the tax for that portion of your estate. To help you better understand the estate tax rules and develop a tax-smart way to distribute your estate, contact a CPA.

Copyright, American Institute of Certified Public Accountants