Plan Your Estate To Reflect Your Intentions

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.