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Perhaps one of the most sensitive topics that tax practitioners face with their clients is in regards to estate and end-of-life planning. Clients will often seek the advice of tax professionals regarding the preparation of a will, incorporating a trust, as well as the use of life insurance. While tax practitioners may not be the source of all expert advice regarding these topics, it is common that tax practitioners will work alongside attorneys and financial planners in planning for the most tax efficient process for distributing their estate and achieving their financial goals. Therefore, it is important that all professionals involved with assisting clients through the estate planning process are well-informed and knowledgeable of the constant changing laws pertaining to estate transfer. With proper estate planning, clients’ are ensured that their loved ones are cared for while beneficiaries of the estate receive as much of their inheritance as possible.
What is an Estate? An estate includes all property that an individual owns; those types of property typically consist of real property, tangible personal property, and intangible property. In further detail, real property is property such as a primary residence or real-estate, tangible personal property includes vehicles, jewelry, and furniture, and intangible property consists of stocks, insurance, and retirement accounts. There is also different types of estates, for instance, the gross estate consists of all the property that is owned or property that the individual possesses an interest in at the time of that individual’s death. The other type of estate is the probate estate, which consists of only the portion of the estate’s assets that does not have a selected beneficiary. Conversely, a non-probate estate includes those assets with a designated beneficiary. A well-planned and structured estate-plan understands which assets transfer using designated beneficiaries and those assets that will become a part of the probate estate. Assets in the probate estate will then get transferred via a will or in absence of a will the assets will get transferred by state law. Goals of Estate Planning Estate planning allows for an individual to possess control of their assets both while they are alive as well as following their death. Therefore, proper estate planning may accomplish three primary goals including:
Life Events to Consider Estate planning is a continuous process that requires constant consideration of life events, for instance newborn children, marital changes, health conditions, life event relative to beneficiaries, and economic and legal changes may significantly impact clients’ estates. Estate Strategies It is important to understand the estate tax and the numerous strategies available as a part of estate planning. As a part of the 2010 Tax Relief Act estates after 2010 are provided with an exemption of $5.43 million while amounts in excess of the exemption get taxed at an effective tax rate of 40 percent. There is an option to opt-out of the estate tax under the 2010 Tax Relief Act which allows for a modified carryover basis allowing for $1.3 million per decedent and $3 million for a surviving spouse. Different estate planning strategies may begin first with ensuring the proper documentation that must or may include: wills trusts, power of attorney, and guardianship. Advanced strategies may include concepts such as:
Each of the list concepts possesses its unique advantages and disadvantages which are unique to each unique circumstance. Therefore, as mentioned previously, estate planning serves as an important aspect for all practitioners and clients. As Ben Franklin once stated, there are two certainties in life, death and taxes.
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AuthorAdam Carr, MBA, EA Archives
July 2023
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