Estate Planning Lessons

Planned Giving

  • Lesson Three: Keeping More of Your Estate

    Two Important Deductions
    If you are married, your estate can qualify for the marital deduction.  This deduction is the value of any property left to your surviving spouse.  In short, your entire estate could pass to your surviving spouse free of any federal estate tax.  But you may need to plan for the death of your surviving spouse. For example, you may have children from a previous marriage that you wish to benefit. There may be good, practical reasons not to leave everything to a surviving spouse.  There’s one other important deduction:  a full deduction for any bequest made for our institution’s benefit or to another qualified organization.

    Will Your Estate Be “Sheltered”?
    If you added up all your assets and discovered that they are worth $11.2 million or less, then your estate is probably sheltered by the estate tax credit. Amounts over $11.2 million are taxed at a 40% rate. You might want to include an inflation factor in your calculations, however.  If your assets appreciate at a rate of only 4% a year, your estate will double in value within 18 years.  Note, too, that lifetime taxable gifts you have made to others will come back into your estate, for tax purposes, and may push your estate beyond the sheltered amount.

    What About State Estate Taxes?
    Even if you won’t owe federal estate tax, your estate may face state estate taxes.  Some states impose inheritance taxes, in which heirs are divided into beneficiary classes.  Those with the closest relationship typically receive larger exemptions and pay tax at lower rates.  Several states impose an estate tax similar to the federal estate tax, but on estates of much smaller size.  Ask your advisers about the state death tax situation in any state where you own property.

    Plan for “Tax Burdened” Assets
    Heirs usually receive inheritances free of all income taxes – but there are exceptions. Certain assets in your estate may pass an income tax liability on to the recipient.  Whoever receives such property from an estate may have to pay income taxes on their inheritance even if no estate tax is due. 

    Examples of tax-burdened assets include U.S. savings bonds and benefits from retirement savings plans, including IRAs.  The technical name for these assets is “income in respect of a decedent” (IRD).

    In the case of IRAs and qualified retirement plans, it’s generally possible to plan your estate so that payments – and taxes – are deferred and stretched out over a beneficiary’s life expectancy, or left in a trust that accomplishes the same goal.  Check with your advisers.

    Note: Tax-burdened assets can be the perfect choice for charitable gifts from your estate plan.  No one will have to pay any income taxes, and estate taxes are avoided as well.  It’s even possible to leave “IRD” for our benefit and reserve lifetime income to a family member from the gift property.  Such an arrangement also can save federal estate taxes, arguably leaving your heirs better off because you provided for a worthwhile cause.

    Minimize Probate Costs
    Probate (discussed more fully in Lesson Four) is the word used to describe the administration of a person’s estate, which includes determining if a valid will exists. The settlement of an estate can be a long, complex and sometimes expensive procedure, due to probate fees and other costs. 

    Certain assets don’t go through probate:  life insurance, most jointly owned property, IRAs or other accounts with death beneficiary designations, and property owned within a revocable living trust.  Some people try to put all their assets into “joint names” to avoid probate, but these attempts may present both tax disadvantages and practical planning problems.

    Property you transfer to a revocable living trust during life is not subject to the delays, expenses and restrictions of probate, however, and can be planned to satisfy personal and tax planning needs.  Trusts may be especially helpful to people who own real estate in several different states and face “multiple probate.”

    Plan for Business Interests
    Business owners need to plan for the smooth transition of their holdings.  A buy-sell agreement with partners, shareholders or others – possibly funded with life insurance – can keep the business intact, preserve its value and provide cash payments to your family.

    A Final Word
    As you review your estate plan, we hope that you will consider adding or enlarging a bequest for our future.  We can show you ways to incorporate gifts in your estate plan that will save “death taxes,” income taxes or both – at a very modest cost to your other beneficiaries.  Indeed, it’s possible to make a bequest for our programs and still provide ample security for your family.

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