A large part of financial planning revolves around planning for your future – even those final days of your later life. Shockingly, while there has been a massive drive to improve financial literacy across America, estate planning does not seem to be on the list of priorities for many Americans. In fact, over 60 percent have no will or estate plan. Although 30 percent of Americans have a will, 71.6 percent say their will or estate plan is not up to date. The reluctance to discuss the end of life and financial decisions has been a long-running one – one that can have disastrous consequences, just as failing to practice savvy tax planning can.
Are Your Wishes Clear, Directed And Documented?
If you fail to have your wishes documented, your assets and estate are then regulated using state laws. For instance, if you die without a will, Minnesota intestate law states that your children will receive an ‘intestate share’ of your estate, and this depends on the number of children, whether you are married, and the parental relationship between your children and spouse. However, if you and your spouse have no other children from past relationships, Minnesota law states that your spouse inherits everything. Families with children from previous relationships are subject to the rule of spouses inheriting the first $225,000 and 50 percent of the balance after tabulation.
With a clear will, you are in control of how your estate is distributed. Similarly, a living will dictates your end-of-life wishes, and a durable power of attorney for finances can provide clarity on who should make financial decisions on your behalf, including making financial investments. Most of these documents are standard inclusions in an estate plan, and can be easily drafted after an initial consultation with an attorney, accountant, and life insurance agent (if you do have a life insurance policy). Alternatively, you can decide to do the asset planning personally through DIY estate planning. Consult a specialized attorney, who can spot oversights and provide you with a standard estate plan bundle.
Does The Federal Inheritance Tax Apply To You?
Another thing to consider is whether your estate will be subject to the federally levied inheritance tax (or death tax). For the year 2021, the federal inheritance tax applies to estates worth $11.7 million. This applies to any assets you intend to bequeath, including cash, real estate, and retirement accounts. If you are married, the threshold is doubled to $23.4 million for 2021. If your estate does meet the threshold, you or recipients of your estate will be liable to a base and marginal rate tax, which will depend on the surplus amount. The marginal tax rate can go up to 40 percent should your estate be worth $1 million or more beyond the threshold.
Find Out The Inheritance Tax Burdens For Your Estate And Recipients
In addition to federal inheritance tax, you and your recipients may also be subject to state estate taxes. When embarking on estate planning, it is recommended that you check whether your state is included in that list. For 2021, some states that have an estate tax include Washington, Vermont, and New York. Also, states like Maryland have an inheritance tax in place, making you liable for both state inheritance and estate taxes.
Keep in mind that an estate tax is levied on your estate directly, which means at the point of distribution, the amount is taxed before distribution to recipients. However, the inheritance taxes are levied on the recipients, and it is their responsibility to pay. If you want to minimize the charges, it may be worth speaking to a tax accountant and financial planner before making decisions in your estate planning package. Finally, ask about any exemptions you may be able to access. For instance, in Maryland, there are a few common property transfers that are exempt from inheritance tax, including the transfer of a primary residence that is owned by domestic partners and held in joint tenancy at the time.
Remember to review your estate plan periodically to amend for any changes. Most experts recommend reviewing them every three to five years. Estate planning is a critical part of planning for your future and wealth management. In the end, failing to plan really is planning to fail.