What is Estate Planning?
It is important that you have little knowledge of what an estate plan is before you consider planning one. You can’t plan something you know nothing about, right? So, what is really the estate planning that people talk about?
Estate planning is basically plans made to take care of ones estate after his or her death. This plan covers:
- The distribution of the deceased assets
- The creation of important estate planning documents like trust, power of attorney
- The management of the deceased assets
- The payment of estate taxes and unpaid debts
- Creation of a will
It is not surprising that about 74% of Americans find estate planning confusing. I bet it’s because whoever talked to them about it, wasn’t quite clear. So, if you fall among the category of people who find this topic hard to understand, below are some simple steps for estate planning. Hopefully, when you get to the end of this article, you’ll find this topic as interesting as your favorite novel.
What is an Estate Tax?
Honestly, estate planning is not one of those fun plans you make, like planning for a trip to the Bahamas, Dubai, or France. Estate planning may not be fun, but failure to do can make life difficult for you and those your care about.
Before we digress from the main topic, what is an inheritance tax?
An inheritance tax is basically a state tax paid by individuals who receive money or properties from the estate of a decedent. Now, it is important you don’t view an inheritance task as the normal federal tax. Inheritance taxes differ from the normal federal tax you know.
Who Pays Estate Taxes?
Inheritance tax is not paid by the deceased (as he or she is dead) neither is it paid from the estate of the deceased. Rather, this tax is paid by the beneficiaries of the deceased’s estate. It is important you note that, as at the year 2020, only six states in the US impose an inheritance tax. Also not all beneficiaries are charged with paying this tax.
States that Charge Inheritance Tax
Below is a list of some of the states that insist on the payment of inheritance tax:
- New Jersey
State inheritance tax laws are dynamic so ensure you do the necessary research before paying your inheritance tax. Inheritance tax can be as low as 1% and as high as 20%.
How to safeguard your assets from estate taxes
Create a Trust:
Creating a trust is one of the best ways to safeguard your estate taxes. With a trust you can escape probate and avoid paying huge estate taxes. Assets placed in a trust will not be included as part of your estate, thus, no inheritance tax will be paid on them. Contact an estate planning attorney to learn more.
Give to Charity:
As shocking as this seems, it is absolutely true. One of the best ways to reduce/ avoid paying inheritance tax is by giving to charity. If you leave a portion of your asset to charity (about 10 percent), the inheritance tax rate on the leftover asset will be reduced. Also, the assets left to charity will be free from this tax.
Look at the alternate valuation date
Normally the basis of the assets of a deceased’s estate is the fair market value of the assets as at the time of death. Sometimes, it is always up to the executor to select the alternate valuation date, which is usually six months post the date of death.
- The AV (alternate valuation) can be adopted if it will reduce the total amount of the estate including the estate tax liability; the result of this is a bigger inheritance to the designated beneficiaries.
- Assets sold during the six months duration is valued on the date of the sale
- If the estate is free from estate tax, the valuation date is the date of death
Create a family limited partnership
If there exist any family-owned enterprise that you want to transfer to your offspring after your death, you can create a family limited partnership. Normally, this requires creating a general partnership and then selecting heirs including family members as limited partners. The main aim of this move is to shrink your estate.
Yes! Offering gifts is one of the best ways to protect your estate from huge taxes. To go about this, you can hand over a portion of your assets to a family member as gift. For instance, for the tax year 2018, you can offer an individual up to $15,000 tax-exempted. While alive, you can offer gift of up to $11.4 million of your wealth before you pay gift tax.