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This is a very rudimentary guide with some things to think about.
You really need to get an estate planner.
Estate planning is deciding how to manage a persons assets during their life so they needs can be meet as they age and so their assets can be passed on at their death with a minimum of administrative problems and avoiding loosing assets to taxes.
As you develop your estate plan, you’ll want to keep in mind how to:
- Try to reduce taxes.
- Provide for your spouse and other beneficiaries.
- Consider giving to charity.
- Ensure your affairs are managed in the event of your incapacity.
Estate planning involves the will, trusts, beneficiary designations, powers of appointment, property ownership (joint tenancy with rights of survivorship, tenancy in common, tenancy by the entirety), gift, and powers of attorney, specifically the durable financial power of attorney and the durable medical power of attorney.
The Legal Documents section that was here has moved to a separate page. (legal-documents.html)
It includes wills, trusts, powers of attorneys, etc.
IRA's:
One of the most important things to do is make sure your beneficiaries are specified in your IRA. That will allow them to continue tax deferred distributions.
If you don't specify beneficiaries or the forms are lost your estate must cash in the IRA within 5 years.
You can name a trust as a beneficiary to give you more control. e.g. specify that children from a previous marriage will get the IRA after your current spouse dies.
After you die, the required distributions can be paid to the trust over the life expectancy of the oldest beneficiary of the trust.
The trustee can withdraw more money if needed to follow your instructions, but the rest can stay in the account and continue to grow tax-deferred. You can name anyone as trustee, but many people name a bank or trust company, especially if the trust will exist for a long period of time.
the SECURE act took effect in 2020
A nonspouse beneficiaries must take distributions over 10 years instead of aa lifetime.
A Roth conversion is one way around this.
A Roth IRA has no required minimum distributions (RMDs) during the account owner’s lifetime and no federal taxes on withdrawals in retirement.
The original owner takes a tax hit. They must pay income tax when they convert part of an IRA to a Roth.
This could mean a big tax bill in the year you convert, because you’ll have to pay taxes on your original contributions as well as any gains you’ve seen in the meantime.
A Roth IRA is subject to the five-year rule, meaning you need to wait five tax years from your first contribution before taking a distribution on earnings in order to avoid a tax penalty. The five-year rule applies to each conversion.
An IRA cannot be converted to Roth after you inherit it.
See:
How Does the SECURE Act Affect Inherited IRAs? | US News
Multiple Beneficiaries:
If you name several beneficiaries for one IRA, the oldest one’s life expectancy will determine the payout after you die. But with separate IRAs (one for each beneficiary), each life expectancy will be used, providing the maximum stretch out.
See:
Understanding Who Should Be Beneficiary of Your IRA - EstatePlanning.com
Estate Taxes:
Dealing with estate taxes is one of the main purposes of estate planning.
The value of an estate typically consists of both the decedent's separate property and one-half of his or her community property.
Federal Estate Tax:
1987-2001 55% of excess over $3 million
2002 50% of exces over $2.5 million
2003 49% of exces over $2 million
2004 48% of exces over $2 million
2005 47% of exces over $2 million
2006 46% of exces over $2 million
2007-2008 45% of exces over $2 million
2009 45% of exces over $3.5 million
2010 35% of excess over $5 million
2012 35% of excess over $5.12 million
2011- 40% of excess over $5.1 million adjusted for inflation since 2012
2021 of excess over $11.7 million
A spouse can inherit your estate without any estate tax.
As of 2016 it was 40% of excess over $5,450,000
The above is basic summary.See Historical Look at Estate and Gift Tax Rates for details.
See also Estate Tax IRS.gov
Trump wants to repeal the federal estate tax, while Hillary Clinton wants to make it more broadly applicable by lowering the exemption to $3.5 million and a top rate of 45%. $3.5 M would only affect 0.2% of estates.
State Estate Tax:
California - none
New Jersey - A progressive tax with rates from about 5% to 16% for estates over $675,000. Only inheritances valued at more than $1.7 million are subject to the highest rate of 16 % as of 2016. For example tax would be $33,200 on an estate of $1 million.
Through a strange quirk in the law, the rates start at a rate as high as 37% on the first $52,174 over the exemption and, thereafter, the rates range from 4.8% to 16%.
An estate of $1,000,000 would pay $33,200 in estate tax.
NJ also has a 15% Inheritance tax. You pay only the max
As of July 2016 there was legislation to increase the exemption gradually to $3 million in 2019 and phase it out in 2020.
See:
NJ Inheritance and Estate Tax Forms
Overview of New Jersey Inheritance Tax Rates and Laws
Six states had an inheritance tax as of 2015: Maryland, New Jersey, Pennsylvania, Kentucky, Iowa and Nebraska and two of them—Maryland and New Jersey—collect an estate tax as well.
An inheritance tax, is imposed on each person who receives property from the estate. It is payed by the individuals not the estate.
In most of these spouses and descendants are exempt.
In New Jersey the rate is from 11% to 16% for amounts over $25,000
See Overview of New Jersey Inheritance Tax Rates and Laws
Some Options to minimize inheritance (Estate) tax.
- Give money away ($15,000 per person in 2018)
- Roth IRA for Kids
- Pay tuition for grandchildren
- Pay medical expenses directly to a hospital
- Trusts
- Inter vivos trust (aka living trust)
- Marital or "A" trust
- Bypass or "B" trust (credit shelter trust)
- Testamentary trust
- Irrevocable life insurance trust (ILIT)
- Charitable lead trust
- Charitable remainder trust
- Generation-skipping trust
- Qualified Terminable Interest Property (QTIP) trust
- Grantor Retained Annuity Trust (GRAT)
- Revocable vs. irrevocable
- Revocable trust: Also known as a living trust, a revocable trust can help assets pass outside of probate, yet allows you to retain control of the assets during your (the grantor's) lifetime.It is flexible and can be dissolved at any time,
- Irrevocable trust: An irrevocable trust typically transfers your assets out of your (the grantor's) estate and potentially out of the reach of estate taxes and probate, but cannot be altered by the grantor after it has been executed.
See Trusts | Fidelity
Books:
Plan Your Estate: Denis Clifford:
Links:
Strategies for Beneficiaries - Estate Planning - Fidelity
Wills, Estates, and Trusts - Table of Contents | ThisMatters.com
Estate Planning Checklist
Key Estate Planning Documents You Need
Estate Planning Around a Second Marriage - Fidelity
last updated 8 Sep 2016
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