By Kelly Twedell Published January 11, 2010 Credit Unions Online
Along with the New Year you may have some resolutions to keep your financial life in order, which includes how your finances will be handled after death. One step to organizing your financial life is Estate Planning.
Before you can plan how to distribute your assets after your death, you need to understand what your estate is. In short, your estate is all your possessions. And understanding what your estate is, you also need to know what your estate is worth.
First you make a list of positive balance items such as:
Cash, checking and savings accounts
Certificates of deposit (CDs)
Stocks, bonds, and mutual funds
Retirement savings in your Individual Retirement Account (IRA), 401(k), and other special accounts
Household furniture (including antiques)
Jewelry, and special collections, You calculate your estate’s value as follows:
Add up the value of all the positive balance items in your estate. If you don’t own a house or any other real estate, you might think that you don’t have an estate, but all kinds of items are considered to be your property.
Subtract the total value of all the negative balance items, such as the outstanding balance of the mortgage you owe on your house or a vacation home, the outstanding balances on your credit card accounts, taxes you owe to the government, or any IOUs to people that you haven’t paid off yet
Federal Laws Help Ease Tax Burden in Estate Planning
The federal tax system includes a gift tax, generation skipping transfer tax (GSTT), and estate (death) tax that work together to make as much of your estate as possible disappear. The laws and rules for these three federal taxes can be somewhat confusing and you might seek the counsel of an accountant and your attorney to help make sense of these taxes:
The gift tax: The federal gift tax is imposed on taxable gifts that you give to others. If you try to avoid estate taxes by giving away a significant portion of your estate while you’re still alive, the government applies a tax on those gifts.
The sort-of-good news is that you have a variety of exemptions and allowances to work with in your gift giving to help you minimize the actual tax bite or even escape the tax bite completely in some cases. Also, even if you make taxable gifts, you may not ever have to write a check for the amount you owe n gift taxes because you can credit the amount of gift tax you owe against any down-the-road estate tax after you die.
The generation skipping transfer tax, or GSTT: The GSTT closes a loophole that the upper class has used to reduce estate taxes. Members of very wealthy families can use a variety of tactics to help shelter family wealth from a tax bite. For many years, wealthy people directly transferred some of their property to members of lower generations - for example, to grandchildren rather than children.
The GSTT closes generation skipping loophole (at least, GSTT proponents position and explain the tax that way) by adding an additional tax - and at pretty hefty rates - to property transfers that can be classified as generation skipping to make up for the amount of tax that you’re trying not to pay.
The estate (death) tax: Luckily, the federal estate tax is scheduled to go away in 2010. You still need to worry about the federal estate tax, no matter how big (or small) your estate is. The death of the estate tax may only be for a single year. Unless Congress explicitly acts to extend the federal estate tax repeal (meaning that 2010 has no estate tax), the estate tax comes back in 2011.
Estate Planning with Homestead Statutes in Mind
Who wouldn’t want their home to be protected after they die? Some states have homestead allowance statutes to make sure that your spouse and any minor children have a place to live after you die. Your homestead is typically defined as your house and may also include a certain amount of adjacent land.
Homestead exemption statutes are closely related to homestead allowance statutes, and apply if your estate needs to pay debts you owe to creditors. If not enough cash is available, the estate is forced to sell off property - real, personal, or perhaps both - to get enough money to pay the creditors. If your estate owes a lot of money for debts, selling off a single high-value item, such as your house, is often easier, rather than trying to sell a lot of smaller items.
Homestead exemption statutes are intended to prevent your surviving spouse and minor children from being kicked out of your home if property does need to be sold to pay creditors.comments powered by Disqus