There is a more complete form of estate planning called legacy planning that you may want to consider. Your legacy plan could contain some financial elements, but you can also include some things that money cannot buy that are very valuable as well. Let’s look at some of the components that could be included in your legacy plan.
We are going to primarily focus on possibilities that have nothing to do with money, but we should discuss the value of wealth preservation for high net worth individuals. There is a federal estate tax that can seriously impact your legacy, because it carries a 40 percent maximum rate.
The reason why this tax is only relevant for people that have accumulated a significant store of wealth is because there is an estate tax exclusion or credit that is relatively high. At the time of this writing late in 2019, the exclusion is $11.4 million. We are mentioning the date because there are typically adjustments at the beginning of every year to account for inflation.
There are a number of different ways to arrange for tax efficient asset transfers if your estate is going to be subject to taxation. The ideal course of action will depend upon the circumstances, but this being stated, there is a commonly utilized type of trust that can optimize your legacy.
This vehicle is the generation-skipping trust. As the name indicates, you would name your grandchildren as the beneficiaries rather than your children. Throughout the life of your children, they would be able to benefit from assets that are contained within the trust and receive distributions from the earnings.
After their passing, your grandchildren would inherit the assets. Yes, the direct transfers would be subject to the estate tax, but one round of taxation would be avoided.
The heirlooms that you have in your possession could simply be sold by your trustee or executor after your passing, and the proceeds could be distributed to the inheritors. This being stated, the objects that have been in your family for generations have value that exceeds mere dollars and cents.
You could inventory all of the heirlooms that you have acquired over the years and examine your inheritance list. Ultimately, you can get the right meaningful item or items into the hands of each respective family member. In fact, you can start doing this with some items while you are still alive.
When you are devising your legacy plan, you may want to consider the inclusion of your personal memoirs. It can be rewarding and cathartic to reminisce and share your memories in writing so that your loved ones can gain a better understanding of your formative experiences.
An explanation of the family history that you remember could be contained within your memoirs, or you could choose to have a document that is strictly devoted to your lineage. Many people start to get interested in their family tree at some point in time, and you can be of great assistance if you share what you know about your family’s roots.
There is another document that has nothing to do with money that can be a powerful addition to your legacy plan. Ethical wills stem from the Judaic tradition, and they go back to biblical times. With an ethical will, you record your moral and spiritual values so that your loved ones will be able to gain access to valuable guidance during challenging times.
We have shared a little bit of food for thought here, and there are some other legacy planning possibilities that we will look at in a future post. This blog has a lot of information, and we go the extra mile to provide help in another way.
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During 2010 the estate tax was temporarily repealed. This repeal was in place due to provisions that were included in the Bush era tax cuts.
Under the laws as they existed during 2010, the estate tax would return in 2011. The amount of the federal estate tax credit or exclusion would be just $1 million. The top rate for estates in excess of $1 million was scheduled to come in at 55 percent.
In 2009 the estate tax exclusion was $3.5 million, and the top rate was 45 percent. It seemed that come 2011, we would be facing a huge tax increase.
Fortunately, in December of 2010 a new tax relief measure was passed through Congress. This measure is called the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
Under terms contained within this act, the estate tax exclusion was set at $5 million for 2011 and 2012. Ongoing annual adjustments for inflation were mandated. A maximum rate of 40 percent was put into place. The law was scheduled to sunset at the end of 2012 again, but fortunately Congress made it permanent in 2013.
For 2012 the Internal Revenue Service raised the exact amount of the federal estate tax exclusion to $5.12 million to account for inflation. Another adjustment was applied in 2013, bringing the amount of the exclusion up to $5.25 million.
2013 is rapidly coming to a close, so the IRS has announced the amount of the estate tax exclusion for 2014. An additional $90,000 will be added to the existing $5.25 million exclusion. Next year the exclusion will be $5.34 million.
Exclusion Afforded to Each Taxpayer
It should be noted that this is a per person exclusion. Each individual taxpayer is entitled to an exclusion of $5.34 million. As a result, if you are married you and your spouse would have a combined exclusion amount of $10.68 million next year.
If you were to pass away next year, your spouse can take some legal steps that would still allow him or her to have a total exclusion of $10.68 million, because the estate tax exclusion is portable between spouses.
Annual Gift Tax Exclusion
In addition to the estate tax there is also a federal gift tax. The two taxes are unified. The $5.34 million exclusion that we will see next year will apply to transfers by gift during your life or by inheritance at death. Because it covers taxable gifts that you give while you're living along with the value of the assets that will be passed to your heirs after you die, the gifts you make that are in excess of the annual exemption will reduce the exemption amount at your death.
The annual gift tax exclusion is the amount you can give without filing a gift tax return or reducing your estate tax exclusion. You don't use up any of your unified lifetime exclusion unless you make a gift to a single person during a calendar year that exceeds the amount of this annual exclusion.
During 2013 the amount of this exclusion has been $14,000. Because of the fact that the Internal Revenue Service raised the lifetime unified exclusion, you may wonder if the annual gift tax exclusion was increased as well.
Unfortunately, the annual gift tax exclusion is not going to be raised for the 2014 calendar year. The $14,000 figure will remain in place next year. Remember, however, it is a per person exclusion, so you and your spouse can gift $14,000 each to your daughter and her husband, a total of $56,000 per year without filing a return or adversely affecting your lifetime exemption.
When you die without a will you are said to have died intestate. Under these circumstances the probate court must sort things out utilizing the laws of the state of Nevada.
If you are married and you have no children your spouse would inherit your property, and conversely if you had children but you weren't married your descendents would be your heirs according to intestacy rules. If you die with a spouse and children, the rules vary depending upon the number of children you have. If you weren't married and didn't have any children your next closest relative would be in line for an inheritance.
The above is understandable, but what would happen if someone who did not have any family died intestate? A very interesting case is playing itself out in New York at the present time, and it answers the question.
In 2012 a multimillionaire former real estate developer named Roman Blum passed away at the age of 97. During his lifetime he had amassed a fortune that is valued at right around $40 million.
Though he had been advised to take action not long before he passed away Blum died without a will or a trust directing his preferences regarding the transfer of his financial assets.
Nobody has come forward claiming to be a relative, and the state has not been able to find anyone. Efforts to locate Blum's next of kin will continue, but there is a three-year rule in New York. Under their escheat rules the state will assume ownership of the assets left behind by Blum if no rightful heir can be identified within three years of his passing.
The estate tax parameters we could expect for 2013 were hazy throughout last year. At the end of 2010 a piece of legislation called the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 was passed that implemented the rules for 2011 and 2012.
Due to provisions contained within this act the estate tax exclusion was $5 million at its base with annual adjustments for inflation. The estate tax, the gift tax, the generation-skipping transfer tax was set at a flat rate of 35%.
This tax relief act was scheduled to sunset at the end of 2012. Under laws that existed throughout the year the maximum rate would automatically go up to 55% while the exclusion went down to $1 million upon the expiration of this measure. This tax increase was one of the perils that we would have faced had the country gone "over the cliff."
Because of the agreement that was reached around the first of the year we avoided the cliff and the estate tax parameters are largely unchanged. We still have a $5 million base exclusion adjusted for inflation. The Internal Revenue Service has announced that adjustment, making the estate tax exclusion $5.25 million in 2013.
The top rate of the federal estate tax has been raised, but the increase is not anywhere near as severe as it could have been. In 2013 the rate has gone up from 35% to 40%, and once again this applies to the gift tax and the generation-skipping transfer tax as well.
Though things could have been worse 40% of your taxable legacy is a lot of money. It is however possible to implement tax efficiency strategies that will preserve your wealth.
As Reno estate planning attorneys we have a thorough understanding of tax laws, and we urge you to contact us to arrange for a consultation if you would like to tap into some professional expertise.
We can be reached by phone at 775-823-WILL (9455), or online at www.wealth-counselors.com.