If you
own assets that you’d like to leave to a loved one, you have an estate. But
without a plan, your state of residence will choose your heir — not necessarily
the result you intended. How can you ensure your intentions will be realized?
Start by understanding the basics of estate taxes.
How estate taxes work. Estate tax applies to
the excess of your gross estate over the allowable exclusion and deductions.
Your gross estate is the current value (not the cost) of everything you own.
The allowable exclusion for 2015 is $5,430,000, and an estate can deduct the
following:
1. Assets left to a surviving spouse, without
limitation.
2. Property left to qualifying charities.
3. Mortgages, debts, and administrative expenses
and losses.
Because
property in your estate is valued at current market value, your heirs can
benefit from a “step-up” in basis. Here’s an example. Say your home cost
$120,000. If the value is $220,000 when the house passes to your heir, your
heir’s basis becomes $220,000. That means if your heir later sells the house
for $300,000, the taxable gain is limited to $80,000 ($300,000 less $220,000).
Planning steps to take. No matter what the
size of your estate, your plan should begin with a will. Your will lets you
distribute property to your chosen beneficiaries, designate guardians for your
dependents, and make charitable contributions. You can also use your will to
establish trusts, another important part of estate planning. Trusts can be used
for asset management, distribution timing, and protecting the inheritance of
heirs who can’t manage their own affairs. In addition, trusts can be useful to
bypass the complexities of probate, the state court system governing
distributions.
Another
initial planning move is to update your beneficiary designations. Some assets,
such as life insurance proceeds and IRAs, bypass your will and go directly to
the designated beneficiaries.
Call us
to get started on your estate plan. We’ll work with your attorney as well as
other members of your financial team to help you achieve the results you
intend.
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