The taxable estate is an estate tax concept. It includes the decedent’s interest in every type of property owned at death, plus property over which the decedent had control at death, even if he or she did not actually own the property. The decedent’s taxable estate includes his or her probate assets AND non-probate assets. Just because the distribution of certain assets at death, such as life insurance proceeds, a retirement account, or a jointly owned house, are not controlled by a will (and are not probate assets) does not mean that those assets are not subject to the estate tax.
The probate estate includes only those assets that are subject to the decedent’s will (or subject to intestate succession, discussed earlier in this book). The taxable estate includes all of the decedent’s assets, even if the assets do not go through probate.
The Difference Between The Taxable Estate vs. The Probate Estate is discussed in more detail in my book “Nothing But The Truth About Estate Planning, Probate And Living Trusts”. Download your copy here:
Nothing But The Truth About Estate Planning, Probate And Living Trusts by Larry Israeloff CPA & tax attorney.
The gift tax is also a component of the federal transfer tax system and is a tax imposed on transfers (i.e., gifts) of property during life, either given outright or to a trust. Like the estate tax, the gift tax is a transfer tax distinct from the familiar income tax.
Generally, the gift tax is determined by applying the transfer tax rate (the same rate that applies to the estate tax) to the value of property above the exemption amount (the same exemption amount that applies to the estate tax) that is gifted by one person to another during their lifetime, but not including property transferred to a spouse.
Thus, the gift tax covers transfers of property during life, while the estate tax covers transfers of property at death. The two taxes work together, and are said to be unified.
So from a transfer tax perspective, is it better to give away property as a gift during life (subject to the gift tax), or to leave assets to heirs in a will at death (subject to the estate tax)? Generally, if you give assets away while you are still alive, you are also ridding your estate of the future appreciation in the value of that asset. The assets you give away now will trigger a lower gift tax (if any) today than an estate tax years from now because of the assets’ appreciated value at death.
Gift Tax Annual Exclusion
Each year, a person can gift to any one or more other persons up to the annual exclusion amount (currently $14,000 per recipient in 2015) without triggering the gift tax. Married couples can combine their individual annual exclusion amounts and gift $28,000 each year to each person without triggering the gift tax.
Annual exclusion is meant to shield from tax the small common gifts made every year to friends and relatives, such as birthday presents, holiday gifts and small tokens of appreciation.
The Gift Tax is discussed in more detail in my book “Nothing But The Truth About Estate Planning, Probate And Living Trusts”. Download your copy here: Nothing But The Truth About Estate Planning, Probate And Living Trusts by Larry Israeloff CPA & tax attorney.
Probate assets consist only of assets owned by the decedent at death that do not pass automatically (i.e., by operation of law) to the intended beneficiaries. A person’s will deals only with probate assets – it does not control the transfer of non-probate assets.
Examples of non-probate assets include life insurance policies (because the insurance proceeds are paid to the beneficiaries of the policy according to the terms of the policy contract, not according to a will), retirement accounts (because upon the death of the owner of a retirement account such as an IRA or 401(k), the monies are paid to the person or persons listed on the decedent’s beneficiary designation form) , and jointly owned property (such as a house or apartment owned jointly by a husband and wife). But keep in mind that a person’s taxable estate for estate tax purposes includes both probate and non-probate assets. The estate tax is discussed in more detail later in this book.
Creating A Trust Can Help Avoid Probate
Property that is owned by a trust is non-probate property, because at the creator’s death the terms of the trust agreement determine what happens to the property, not the creator’s will. Unlike a will, a trust does not have to go through probate. Thus, property owned by a trust avoids probate and is managed without the hassles and expense of probate court proceedings.
“Probate?” is discussed in more detail in my book “Nothing But The Truth About Estate Planning, Probate And Living Trusts”.Download your copy here: Nothing But The Truth About Estate Planning, Probate And Living Trusts by Larry Israeloff CPA & tax attorney.
Probate is the legal process that takes place after someone dies of proving the validity of a will or establishing who is entitled to receive the decedent’s property under state intestate succession laws if there is no will. The probate process is handled by the local surrogate’s court and governed by state law. Probate involves paperwork and court appearances by lawyers, which costs money.
As a general rule, a will has no legal effect until it is probated. Probate includes proving in surrogate’s court that a decedent’s will is valid, identifying and collecting the decedent’s property (also referred to as the decedent’s estate), paying debts and taxes of the estate, and distributing the remaining property as the will (or state intestate law, if there is no will) directs. In effect, probate is the process that enables heirs to receive property that is rightfully theirs.
Advantages of Avoiding the Probate Process
Wills and probate proceedings are matters of public record. If you would like to keep your affairs private, and prefer that people don’t know how your estate was distributed, avoiding probate through a trust or other mechanism is the only way to do so.
The probate process can be complicated and time consuming, so it may take several years to completely resolve everything. Typically, assets are frozen and unavailable to beneficiaries (including the surviving spouse) for a period of time without prior court approval. Avoiding probate can speed up the process of settling your estate.
Probate costs, including attorney’s fees, can be expensive. This is especially true if you own real estate in a different state, because probate proceedings would be required in both states. A trust can help to correct this problem.
“What Is Probate?” is discussed in more detail in my book “Nothing But The Truth About Estate Planning, Probate And Living Trusts”. Download your copy here: Nothing But The Truth About Estate Planning, Probate And Living Trusts by Larry Israeloff CPA & tax attorney.
You should always work with a lawyer when setting up a trust. A poorly created trust can be confusing, expensive, and/or ineffective. The trouble with do-it-yourself planning is that even if your situation seems simple, you are not aware of and won’t think of the many unusual things that can go wrong, especially with wills and trusts. These mistakes can end up costing you or your heirs a lot more than you saved in legal fees.
If you have a unique situation, need a special needs trust for a disabled beneficiary, or are overwhelmed by a complex or large estate, hiring a trusts and estates lawyer will help you answer any questions and ensure that a legal and effective trust is created.
As both an attorney and a CPA, I am a “one-stop shop” for legal, accounting, tax and financial planning services. I can help people more effectively manage their wealth and establish an estate plan that is coordinated with and fits neatly among all the pieces of their personal lives – household budget, cash flow, investments, education planning, taxes, and retirement planning.
“Why Retain An Attorney To Establish A Trust?” is discussed in more detail in my book “Nothing But The Truth About Estate Planning, Probate And Living Trusts”. Download your copy here: Nothing But The Truth About Estate Planning, Probate And Living Trusts by Larry Israeloff CPA & tax attorney.
To the layperson, trusts can appear complicated. People often think trusts are only for the very wealthy. In reality, trusts can be useful for people of all income levels.
A trust is a legal arrangement under state law governed by a written trust agreement by which property or assets are owned in the name of one or more trustees with a fiduciary responsibility to protect and manage the property for the benefit of another person or persons. A trust divides the ownership of property into two parts: the legal title, which is in the name of trustee, and the beneficial ownership interest, which is managed by the trustee for the benefit of the beneficiaries.
A trust is created by the signing of the trust agreement by the creator (also called the grantor or the settler of the trust) and the trustee. The trust agreement specifies the duties and obligations of the trustee and how the income and principal of the trust will be distributed to the named beneficiaries. Trusts provide considerable flexibility in transferring property from one generation to another.
A trust created during the creator’s lifetime is called an “inter vivos” trust or living trust. A living trust can be either a revocable trust or an irrevocable trust. A revocable trust is a trust that can be changed or revoked by the creator. An irrevocable trust cannot be changed or revoked by the creator (although an irrevocable trust can sometimes be changed or terminated by the trustee under certain circumstances).
A trust created in a will when the creator dies is called a testamentary trust. It is a part of the creator’s estate plan. Testamentary trust is always an irrevocable trust, because the creator is not alive to change or revoke the trust.
Common Types of Trusts
Living trusts (revocable and irrevocable) and testamentary trusts can be created for many different purposes and are referred to using many different names depending on their main purpose, such as asset protection trust, charitable trust, special needs trust, credit shelter trust, bypass trust, dynasty trust, grantor trust, Crummey trust, life insurance trust, personal residence trust, and many others. Despite the variety of labels applied to them, all trusts are basically arrangements to hold and control property for the benefit of other people.
Trust As Part Of An Estate Plan is discussed in more detail in my book “Nothing But The Truth About Estate Planning, Probate And Living Trusts”. Download your copy here: Nothing But The Truth About Estate Planning, Probate And Living Trusts by Larry Israeloff CPA & tax attorney.
It is never too early to begin retirement planning. Unfortunately, many people put it off. If you are wondering what you can do now to ensure you are set for retirement – even if it is decades into the future – consider these five tips.
Consider Your Retirement Activity Plans
People dream of their retirement, expecting to be comfortable. But many are unsure how to make the transition to a “life of leisure” once the time arrives. In order to make sure you have enough money to truly have leisure time, you need to determine how that time will be spent.
Are there dreams you have postponed until after you stop working? Do you want to travel? Are you hoping to stay active in your community? Will you be sharing the activities of your retirement with an also-retired spouse? The important thing is to get a handle on your retirement activity plans, so you can do what it takes now to make these dreams a reality.
Create a Savings Goal
Once you know how you intend to spend your retirement years, you can begin planning how much money it will take to live that way without a steady employment income.
Questions to ask yourself:
- Realistically, how much will it take to maintain your current lifestyle?
- Do you plan to drastically change that lifestyle once you retire?
- What will you add and subtract from the way you live now?
- What does your retirement income future look like, including savings, social security, pensions, etc?
Your goal is to create a ballpark figure you can work toward that will allow you to make your retirement dreams a reality. Once you have a number range in mind, you can better plan to accomplish that savings nest egg goal.
In addition to saving money for healthcare costs as you get older, there are a few specific things you can do now and in the years leading up to retirement that will help you ease the financial burden of your health as you get older. Investing in long-term care insurance is one of the best moves you can make now to protect you in the future. Some say it can be costly, but should you become seriously ill in your senior years long-term care insurance will help protect your savings by paying for a large part of the medical expenses. Plans vary so shop around.
The sooner you begin to pay down your debts the better your retirement funds will be. Avoid taking on any high-interest debt as you near retirement and focus on paying your higher interest loans as soon as possible. Ideally, you will have no debt by the time you reach retirement, but if this is unreasonable, focus on reducing it as much as possible.
Hire a Financial Advisor
If you are not already working with an expert to help you plan for retirement, now is the time to find someone. Your investment needs are going to change over the years and having a professional in your corner can really make things easier. Discuss the plans you have for retirement with your financial planner and let him or her help you create a plan that will get you to the point you want to be by retirement age.
The most important thing to remember about retiring is there are very few rules that are hard and fast that apply to every situation. Some people don’t even want to retire because they enjoy working and fear they will get bored with no job. Others want to retire earlier than usual or are willing to work just a few extra years to build up additional savings. Every individual has his or her own unique situation and should plan accordingly so retirement can be an exciting life transition.
A Personal Financial Specialist, or PFS, is an individual who is highly qualified to offer advice on a variety of financial issues and has earned the PFS credential from the American Institute of Certified Public Accountants. He or she can help you establish and build an investment portfolio, minimize your taxes, assist with estate planning, recommend insurance, and help you plan for retirement. It is possible for you to do all of these things on your own or to work with separate advisers in each wealth management area, but a PFS is a one-stop shop who can organize the process and focus your efforts. A PFS provides personalized attention and advice based on your specific circumstances.
Setting Goals and Creating a Financial Plan
There are three things you and your PFS will do initially and on an ongoing basis to determine how best to manage your wealth:
- First, you will assess your current situation.
- Then, you will set financial goals and choose the means to achieve them.
- As time passes, you will evaluate your progress toward your goals, determine if those goals still apply, and make adjustments to your plan when necessary.
Putting Things in Perspective
Statistics on financial planning can be frightening when you think about how quickly the years pass and retirement arrives. According to BusinessInsider.com, only 50% of Americans have more than a single month’s income saved. Many people are also unaware of what they are spending and how their current spending habits affect their long-term savings goals. A PFS will evaluate your current financial position, analyze your finances from a uniquely professional viewpoint different from your own, and help you determine what changes must be made now to help achieve your long-term goals.
Empowering You Financially
Working with a PFS helps you put your current earnings, your projected earnings, and your long-term outlook into proper perspective. He or she does not make decisions for you or take control of your money. Instead, the two of you work together to determine the appropriate financial path you should be following. It is entirely up to you whether or not you want to act on the advice of a PFS.
The world of finance and wealth planning can feel overwhelming, especially if you are just beginning to consider your financial future. A PFS can provide information, education, and guidance to help you get a solid grip on your financial situation.
Everyone has been talking about it, but it still seems some are unaware of the stipulations of the Affordable Care Act. The ACA mandates that all Americans have qualifying health insurance coverage or pay a penalty to the IRS. The penalty in 2014 was 1% of your household income or $95 per person. But in 2015, the penalty increases to 2% of your total household income or $325 per person.
There are also a few 2015 changes regarding flexible spending accounts for healthcare costs that relate to rollover savings. If you carried over the allowed $500 into 2015, you are ineligible to save in a general purpose FSA this year. Unfortunately, it’s too late to spend what was left in your 2014 account to qualify, but now is a great time to discuss your health savings situation with your employer and/or your tax advisor.
As of the first of this year, you can only make one rollover from an IRA to another IRA within a 12 month period. A rollover counts as withdrawing funds from one IRA, holding them for fewer than 60 days, and then depositing them into another IRA.
There are also changes to 401(k) limits this year. The limit on employee contributions increases to $18,000, so you are eligible to deposit $500 more than last year into retirement savings. In order to do this, you must let your employer know you want to increase your contribution. If you haven’t already, make the change now to take advantage of the most savings available.
Other increases are also available this year, including:
• Employees over the age of 50 are now allowed an additional $500 ($6,000 total in addition to the standard amount) for 401(k) “catch up” contributions
• Increases also apply to 403(b) and 457 retirement accounts
• Employees can now contribute $2,550 to their flexible spending accounts to put toward healthcare costs
There are a few additional changes to be aware of that relate to the amount of money you earn in 2015.
First, the AMT exemption has increased to $53,600 for individuals and $83,400 for joint filers, which is a 1.5% increase from last year.
Income tax thresholds have been adjusted for inflation, too. The highest tax rate (39.6%) applies to single filers earning at least $413,200 annually and joint filers earning $464,850. This is an increase of about 1.6%.
Finally, 2015’s standard deduction increases to $6,300 for single filers and $12,600 for joint filers. The standard deduction for heads of household rises to $9,250. Keep in mind that itemized deductions such as medical costs, taxes, interest expense and charity donations provide a tax benefit only if in total they surpass the amount of the standard deduction.
Estate planning puts your mind at ease and makes things easier for your loved ones once you are gone. Nobody can predict the future and emergencies can occur at any time, which is why it is important to plan your estate now.
By not taking action now, you allow the government to get first crack at your estate when you die. The government’s goal is to take as much of your assets as possible, and it has no desire to help you or be sympathetic to the loss your loved ones just experienced.
There are several things you can do right now to tie up loose ends in your estate. Begin by compiling an inventory of your assets and creating a will or updating your existing will. Dying without a will can cost your heirs their inheritance and leaves you with no control over how your assets are handled once you are gone.
In addition to or in place of a will, you might want to create a trust. Trusts control how your assets are administered and distributed, eliminate delay of this distribution, and might allow you to reduce your estate taxes. Having a plan in place and discussing the details of the plan with your heirs now can avoid disputes and confusion in the future.
Overcome the Discomfort of End-of-Life Planning
Unfortunately, people often delay estate planning for a variety of reasons. Most healthy people are focused on living their lives, not preparing for their deaths. The idea of growing older or dying unexpectedly does not enter their minds. People struggle to make difficult choices and decisions that could upset family members. The estate planning process can be uncomfortable and unpleasant, but avoiding it makes things in the future even more uncomfortable and unpleasant.
A few important items to remember as you start the estate planning process:
- In addition to a will, you should also designate a power of attorney. This is the person or entity that will make decisions on your behalf if you become incapacitated.
- You should consider a living will and a healthcare proxy, also known as a medical power of attorney. This eases the burden on your loved ones regarding the difficult decisions they will need to make if a medical emergency arises.
- Be aware of federal and state laws when making decisions about your estate. An estate planning expert can help you bring everything together and make the best decisions for your circumstances.
Finally, if you already have a will or trust in place, but it’s been awhile since you’ve reviewed it, now is the time. As your life changes, it is important to update and revise your estate plan.
If you have questions about the most recent changes to the tax laws or you need assistance with tax or estate planning, contact an experienced tax professional. Feel free to contact us to answer your questions at 516.537.4440