by Keith Dorney
- Consider a living trust and whether it is right for you now or in the future.
- Schedule interviews with three local estate planning attorneys, ask them specific questions (given your new found estate planning knowledge), and pick the best one to help you with your plan.
- Record all information from this section, including account numbers, usernames, passwords, and the location of important documents in the Bling section of your Bus List.
Part II: More Estate Planning
Location of Your Bus List
Once you complete your Bus List, you can’t just file it away and forget about it. Whenever you change a password, open a new account, or need to swap out a brain or beneficiary, your Bus List needs to be updated. If a major change in your life occurs, like a birth, adoption, death, or job change, that’s a good time to read over your Bus List and make any needed changes.
Of course, your Bus List also needs to be assessable by the person you named to retrieve it upon your passing or declared mental incapacitation. It would be a real shame if you went to the trouble of writing your Bus List and nobody found it until after it was too late.
Don’t take your Bus List’s location for granted. Most of the items falling under the Body and Brains sections are rather harmless in someone else’s hands.
Information in your Bling section, however, is of a highly sensitive nature. Great financial harm could come to you if an unscrupulous individual got their hands on it.
The Bling section of your Bus List more than likely will contain your social security number, the social security numbers of your loved ones, plus usernames, passwords, and lots of other sensitive stuff. You’ve got to secure it!
One option is to write down, print out, or save your Bus List and store it in a secure location. Possibilities include an encrypted or password protected file, a file folder stowed away in a secret place, or a thumb drive in your safe.
Another option is to park your Bus List, whether printed out or saved to media, in a safety deposit box. That’s probably one of the safest places, but it can be a hassle to have to retrieve it every time you need to make changes.
Make sure your trusted someone has a key and knows where to look when it’s game time. If you’re rude enough to die on a weekend or holiday, immediate access may not be possible.
There are myriad on-line options too. This is a decision all of us need to make when securing our sensitive data: Do we want to take responsibility for securing it ourselves, or do we turn that responsibility over to someone else?
Share your Bus List’s location with one, possibly two or three trusted individuals, depending on your circumstances. In the case of married couples and domestic partners, simultaneous death is rare but can happen. It’s just a matter of how paranoid you want to be, but better to err on the safe side.
Keep in mind many identity thieves turn out to be family members. I know this would never happen in your family, but it bears mentioning.
Estate Liquidity
Your estate is going to incur expenses. Make sure you have enough liquid cash available in your estate to pay for them. Typical expenses include:
- funeral related expenses
- probate fees
- executor and administration fees
- debts of the decedent
- state, federal, and estate taxes
- attorney and accountant expenses
If there are insufficient funds made available in one’s estate to pay expenses, this could present big problems. That money has to come from somewhere. It can get tricky.
A non-liquid probated asset might need to be sold. Or, if your heirs received assets through will substitutes, your executor and probate judge must decide how to solicit those heirs for their fair share of expenses.
It’s like trying to put the Genie back in the bottle, especially if heirs received assets like real property that are not liquid. Often, this can be confusing and makes it extra hard on your executor and beneficiaries.
If you decide on a trust, make sure you transfer enough liquid assets into the trust to handle the job, and specifically spell out their use in the terms of the trust. Another option is to allow the appropriate liquid assets to be probated. Your executor will then have the cash available to pay those last expenses.
Life insurance is another way to provide estate liquidity. Naming your estate or trust as the primary beneficiary insures the amount paid out will be available for use by your named brains.
These expenses are deductible on your estate tax return if your estate needs to file one. If your gross estate is greater than the estate tax exemption amount, you’re obligated to file a return, even if you don’t end up owing any tax. This goes for both federal and, if appropriate, state estate and gift taxes.
Federal Estate and Gift Taxes
For most, federal estate and gift tax liability is a non-issue because you won’t owe any. Thanks to the passage of the Tax Cuts and Jobs Act at the end of 2017, the exemption amounts were raised dramatically. The first $11,580,000 of a decedent’s lifetime gifts and estate is not subject to federal estate tax in 2020. If you’re married, double it to $23,160,000.
Moving forward, well over 99.9% of estates won’t have to pay any federal estate tax. Forget the “one percenters.” We’re talking the one-tenth of one-percenters! (Not quite as catchy.)
Brain Cramp Warning: If your estate is well under those exemption amounts, do yourself a favor and skip to the next section. The discussion is going to get a bit mind numbing. If your estate’s worth is approaching those numbers, take a deep breath and read on.
What’s Your Exemption?
If you made gifts in the past of more than the yearly gift tax exclusion amount (currently $15,000 in 2020), your federal estate and gift tax exemption could be less. When gifting more than the gift tax exclusion amount to anyone in a given calendar year, you are required to file a gift tax return to let Uncle Sam know you used some of your gift/estate tax exemption.
To calculate your adjusted exemption amount, subtract the gift tax exclusion from the market value of the gift. Then subtract that amount from the gift/estate tax exemption.
Example 8: Calculating Your Exemption
You gifted $50,000 in 2020 to one of your kids to help them with the down payment on a home. You are required to report a gift of $35,000 (50,000-15,000) to Uncle Sam on the proper form (IRS form 709) and file it along with the rest of your federal tax documents for the year. This reduces your future estate tax exemption by that amount.
It’s confusing because even though you have to file a gift tax return, no gift tax is owed until the current unified gift and estate tax limit of $11.58 million (2020) is reached.
You see, Uncle Sam doesn’t care whether you give away your assets during your lifetime (via a gift) or through your estate — he’s going to get the same tax either way. The gift and estate tax schedules, as well as the gift and estate tax exemption amounts are “unified,” and gifts over the yearly exclusion amount erode the estate tax exemption.
Sound complicated? It is, and I’ve barely scratched the surface. If your estate is approaching or over the exemption, know you’ve got a bit more work to do, and professional help consummate with the complexity of your situation is warranted.
The value of your gross estate may be more than you think. It is literally everything you own, including the death benefit on life insurance (unless it’s in a legal irrevocable life insurance trust), the value of all real estate owned, securities, personal possessions, business interests, cash, and any other assets you own. If you’re married, also include one-half the value of assets owned jointly or as community property.
Exemption Portability
If you’re married, make sure the surviving spouse sees to it that a federal estate tax return is filed on behalf of the deceased spouse’s estate.
That way, when the surviving spouse dies, he or she gets to use $23.16 million as their exemption amount rather than $11.58 million (as
suming all assets passed to the surviving spouse as is typical with marital estate planning).
Thanks to the American Taxpayer Relief Act of 2012, just two things are necessary to assure portability of the exemption to the surviving spouse:
- Bequeath assets to your surviving spouse
- File a federal estate tax return on behalf of the deceased spouse’s estate
Example 9: Exemption Portability Between Spouses
Saumya passes with a gross estate worth $12 million along with $1 million in debts and other expenses. Even though her estate won’t owe any tax, her estate is still obligated to file a federal estate tax return because her gross estate was over the exemption amount.
If Saumya is married and she is the first to die, it is especially important that a federal estate tax return is filed, even if she is under the limit. That way, her surviving spouse will get to use $23.16 million as his federal estate and gift tax exemption amount (assuming Saumya bequeathed her assets to him as is common with marital estate planning).
As far as federal estate and gift tax planning goes, this simplifies matters immensely. So called AB and ABC estate planning and Bypass Trusts are no longer necessary to preserve the deceased spouse’s exemption. If you live in a state that has a state estate and gift tax and a low exemption amount, however, these trusts may still be warranted. (See State Estate and Gift Tax and Inheritance Tax for details.)
Indexed For Inflation
If the value of your estate is getting up there, making yearly gifts equal to or less than the yearly exclusion amount to one or more folks during the latter part of your life is a nifty way to reduce your estate’s worth, thus keeping Uncle Sam out of your pocket. Plus, you get to gaze upon those smiling faces and hopefully see your hard earned money put to good use.
Know that the exclusion and exemption amounts are both indexed for inflation, so you’ll be able to make larger gifts in the future, if you so desire, without touching that ever expanding exemption amount.
Year ~ Federal Estate and Gift Tax Exemption ~ Gift Tax Exclusion
2020 ~ $11.58 Million ~ $15,000
2019 ~ $11.40 Million ~ $15,000
2018 ~ $11.20 Million ~ $15,000
2017 ~ $5.49 Million ~ $14,000
2016 ~ $5.45 Million ~ $14,000
2015 ~ $5.43 Million ~ $14,000
2014 ~ $5.34 Million ~ $14,000
2013 ~ $5.25 Million ~ $14,000
2012 ~ $5.12 Million ~ $13,000
2011 ~ $5.00 Million ~ $13,000
With the passage of the Tax Cuts and Jobs Act and doubling of the exemption, only the uber-rich need worry about estate tax.
If you’re one of them, remember these numbers will continue to grow. We won’t have low inflation forever. That’s an important take-away as far as federal estate taxes go. Be generous, and mind the ever-getting-larger gift tax exclusion so you’ll be able to take advantage of every penny of your estate tax exemption when it’s your time.
State Estate and Gift Tax and Inheritance Tax
State estate and gift taxes, like federal estate and gift taxes, are levied against the gross estate of a decedent. Some state estate and gift tax exemption amounts are tied to the federal amount, which in 2020 is $11.58 million dollars. Most are currently much lower.
Inheritance tax is different than state estate tax. Inheritance taxes are paid by the heir receiving the inheritance, not by the estate of the decedent like with estate tax. Six states currently have an inheritance tax. There is no federal inheritance tax.
How much inheritance tax you pay depends on your relationship with the decedent. Spouses are exempt from inheritance tax in all states. Generally, the more distantly related the beneficiary is from the decedent, the greater the tax rate. These percentages and any exemption amounts vary from state to state.
States have been changing their laws regarding estate and inheritance tax a lot lately. For instance, North Carolina, Ohio, and Tennessee, and most recently New Jersey and Delaware repealed their state estate and gift tax, and Indiana repealed its inheritance tax. Other states, like Rhode Island, Connecticut, Hawaii, and Maryland have raised their exemption amounts.
It’s tough to keep track. State and local laws change frequently. Check your state’s website for the latest information.
States With An Estate and Gift Tax
- State Name ~ State website
- Connecticut ~ https://portal.ct.gov/drs
- District of Columbia - https://otr.cfo.dc.gov/
- Hawaii - http://tax.hawaii.gov
-Illinois - https://mytax.illinois.gov/_/
- Maine - https://www.maine.gov/revenue/
- Maryland - https://taxes.marylandtaxes.gov/
- Massachusetts - https://www.mass.gov/orgs/massachusetts-department-of-revenue
- Minnesota - http://www.revenue.state.mn.us
- New York - https://www.tax.ny.gov
- Oregon - https://www.oregon.gov/DOR/Pages/index.aspx
- Rhode Island - http://www.tax.ri.gov
- Vermont - https://tax.vermont.gov/individuals
- Washington - https://dor.wa.gov/
States with an Inheritance Tax
- State Name ~ State website
- Iowa ~ https://tax.iowa.gov
- Kentucky ~ http://revenue.ky.gov
- Maryland ~ https://taxes.marylandtaxes.gov/
- Nebraska ~ http://www.revenue.nebraska.gov
- New Jersey ~ https://www.state.nj.us/treasury/taxation/
- Pennsylvania ~ https://www.revenue.pa.gov/Pages/default.aspx
Limited State Exemption Portability
States have been slow to adopt portability laws for married couples that sync with the new federal law (American Taxpayer Relief Act of 2012). The estate planning provisions in the American Taxpayer Relief Act made it much easier for a deceased spouse’s federal exemption amount to be passed on for use by the surviving spouse, effectively doubling the surviving spouse’s available exemption amount (currently $23.16 million for the surviving spouse).
Since passage of this legislation at the federal level, more and more states are adding this portability feature at the state level as well, including Hawaii and Maryland, . Check your state’s website for details.
For residents of states with a state estate tax and no portability, tools like Bypass Trusts, QTIP elections, and AB trust planning may still be useful to reduce state estate and gift tax liability.
Read about those specialty trusts in the Glossary, then seek the services of an attorney licensed in your state of residence for help with your estate plan if you’re in that situation.
Community Property vs Common Law States
When it comes to estate planning, it helps to be familiar with the laws applicable to your state of residence. This is especially true if you’re married. Although laws vary from state to state, how your state of residence handles the issue of who owns what depends largely on whether it is a community property state or a common law state.
The main difference between the two is how the “spousal share” is determined. This is important for estate planning purposes if you’re planning a marriage (or contemplating a divorce).
There are ten community property states. If your state of residence isn’t on the list, then it’s a common law state:
Community Property States:
- *Alaska
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
*Note that Alaska is an “opt-in” community property state, allowing couples to designate specific assets as community property.
Common Law States
Common law states, also known as equitable distribution or non-community property states, handle the concept of the spousal share differently than community property states.
For estate planning purposes, each spouse�
��s share of assets is determined mainly by who is the owner of record. In the absence of a legal title, who the asset was gifted to or who paid for it determines ownership.
Example A: A married man takes title to an automobile in his name only. Common law states assume it was the couple’s intent to have the car as his individual asset, so it is considered his sole and separate property, even if both spouses drive it and jointly pay for upkeep.
Example B: A married woman bought a house for herself and husband to live in with money acquired from before their marriage. Title to the house is taken in her name only. The house is considered her sole and separate property.
In a divorce, property is split fairly but not necessarily equally between spouses in common law states. The process of determining each spouse’s share is more subjective than in community property states. Factors such as the spouses own levels of acquired wealth, the presence of minor children, the length of the marriage and other factors determine the actual amounts.
In common law states, a spouse cannot exclude the other from an inheritance, even if a deceased spouse had all assets solely in their name. You can’t “dis” your spouse through your estate planning.
The forsaken spouse can sue for his or her spousal share and, depending on the circumstances and your common law state’s particular rules, be awarded at least half (in some cases much more) of their deceased spouse’s estate.
A properly drawn pre-nuptial or nuptial agreement can override your state’s rules, as can protecting property through a trust. Consult an attorney licensed in your state of residence for help when drawing up these types of protections.
