The history of estate taxes in America has been a long and winding road. Careful estate planning is still one of the most important ways to manage and protect your assets for your heirs.
The Stamp Act of 1797 was the first federal estate tax in the United States and was passed to help fund an undeclared war with France; it was repealed in 1802. The Revenue Act of 1862 reinstated the estate tax in order to fund the Civil War; it was abolished in 1870. To finance the Spanish American War, the War Revenue Act of 1898 was passed, and subsequently abolished in 1902. Due to the costs of World War I, the Revenue Act of 1916 reinstated an estate tax that, in some form or other, has been in effect ever since.
The Economic Growth and Tax Relief Reconciliation Act of 2001 gradually increased the federal estate tax exemption, until finally repealing the federal estate tax altogether for the 2010 tax year only. The Tax Relief Act of 2010 reinstated the federal estate tax with a $5 million exemption, indexing the exemption for inflation after 2011. The provisions of the Tax Relief Act of 2010 expired on December 31, 2012.
The American Taxpayer Relief Act of 2012 increased the federal estate tax rate from 35 percent to 40 percent, but left in place the higher exemption level ($5.45 million in 2016 up from $5.43 million in 2015); both provisions are now permanent. It also left in place the “portability” of any unused exemption between spouses.
What Is the Best Form of Property Ownership for Me?
In planning your estate, it is customary to consider wills and trusts (as well as intestacy) as a means of property distribution. As a matter of fact, the manner in which you hold title to your assets may supersede provisions contained in other transfer documents. Likewise, significant tax benefits can be gained (or lost) depending on the characterization of your property.
Let’s take a look at the general classifications of ownership.
Sole Ownership
Sole ownership occurs when one owns a complete interest in property. Ownership is passed by the typical transfer documents, or by the laws of intestate succession. The complete interest is included in the estate of the decedent. Because of this, the beneficiary receives a full step-up in basis. This, in essence, brings up the original purchase price to the fair market value, thereby eliminating a capital gain.
Joint Tenancy
Joint tenancy exists when two or more persons share equal, undivided interests in property. Joint tenancy is not limited to spouses. Anyone can share joint interests, but there are tax benefits when this arrangement is shared only between husband and wife (qualified joint tenancy).
A joint property interest cannot be passed through traditional documents, such as a trust or a will. Ownership of a joint interest passes by “operation of law” to the surviving joint owner(s). Further, property held in joint tenancy will not be subject to probate.
Under qualified joint tenancy, half of the property is included in the first decedent’s estate. Because of this, the surviving spouse obtains a stepped-up basis only on the first decedent’s half of the property.
If any nonspouses participate in joint ownership, the entire value of the property is includable in the decedent’s estate, reduced to the extent that the estate can prove that the surviving tenant(s) contributed to the cost of the property.
Another form of joint ownership — tenancy by the entirety — is similar to joint tenancy, but it can only be created between husband and wife. Unlike joint tenancy, an interest cannot be transferred without the consent of the spouse. Tenancy by entirety is only recognized in certain states.
Tenancy in Common
Tenancy in common provides an undivided interest in property between two or more people. Unlike other forms of joint ownership, however, these interests can be owned in different percentages.
A tenant in common can utilize the traditional transfer documents, but interest cannot be passed by operation of law.
Community Property
Under community property statutes, all property earned or acquired by either spouse is owned in equal shares by each spouse. The essential principle of community property is that the earnings of either husband or wife and the revenue from their property belong not to the producer but to the community of the husband and wife.
For estate conservation purposes, there are no restrictions on how each spouse can give away his or her half of the community property. There is no law requiring one person to leave his or her half to the surviving spouse, although, of course, many do.
Currently, nine states have community property laws: Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin.
The amount includable in the estate of a decedent is based on his or her percentage of ownership. The beneficiary of the property interest receives a stepped-up basis on that portion of the property. It is important to remember that the beneficiary can be chosen by the decedent. This is in contrast to joint tenancy, under which the surviving joint tenant(s) automatically inherit the interest of the decedent.
Could My Family Benefit from a Family Limited Partnership?
Effective estate planning should address wealth transfer from a practical and cost-effective approach. One estate planning strategy that families with closely held businesses should consider is the family limited partnership.
What Is a Family Limited Partnership?
A family limited partnership is a partnership agreement that exists between family members who are actively involved in a trade or business. The partnership divides rights to income, appreciation, and control among the family members, according to the family’s overall objectives. Under family partnership rules, the “family business” can include real estate or investments.
How Is This Arrangement Achieved?
Under the most common form of family partnership, you would begin by creating general and limited partnership interests in your business. Once the partnership is established, you then gift the limited partnership interests to your children.
By holding the general partnership interest, you are considered the “general partner” and maintain control over the enterprise. Your children are the “limited partners,” and the limited partnership interest lets them share in the ownership of your business as well.
A Sound Strategy for Transferring Ownership
A family limited partnership enables you to provide your children with an interest in your business while achieving many goals. First, you can gauge whether or not they possess suitable ownership abilities by involving them in the business. Second, it removes the asset from the parents‘ estate, thus lowering the estate tax liability, if properly executed. In addition, you can transfer the limited partnership interests in increments over time, resulting in a gradual, systematic transfer of ownership. Finally, and perhaps most importantly, there may be immediate income tax benefits.
Estate Tax Savings
The interests transferred to your children, including all appreciation since the transfer, escape inclusion in your estate when you die. Only the value of the taxable gift(s) will be included. This can result in estate tax savings down the road.
The Benefits of Leverage
By giving the partnership interests in increments over time, you can take maximum advantage of the $14,000 annual gift tax exclusion. The exclusion increases to $28,000 if you’re married and if each spouse elects to give the maximum amount. The gift tax exclusion is indexed for inflation.
In addition, “minority discounts” — allowable reductions to the value of the gift because it is a minority interest — can lead to greater leverage of the annual exclusion and the unified credit. For instance, you may be able to discount the value of the gift up to 30 percent or more. However, in order for the discount to be valid, there must be a legitimate business reason for the partnership.
Generally, your wish to keep the business in the family is a legitimate reason to set up a partnership agreement — as long as you are joined together for the purpose of enterprise and not just to avoid taxes.
Income Tax Benefits
Aside from the estate planning advantages, the family limited partnership can result in substantial income tax savings. By including your children as partners and sharing partnership income with them, total family taxes may be reduced.
You should be aware, however, that if the income is unearned and the recipient is under age 14, “kiddie tax” rules will apply.
Other Opportunities Can Serve Your Family
In addition to family limited partnerships, there are other arrangements that can serve family interests:
Family partnerships are arrangements under which each partner must play a role in the management and day-to-day operations of the business. Many of the benefits are similar to that of a limited partnership, but the family members accept more liability and will be more involved in the business. As managing partner, however, you must always receive a minimum income share that is proportional to the value of your services.
In addition, minors typically cannot be partners unless there is someone who controls the interest for the minor.
Investment partnerships are partnerships that hold nonbusiness assets such as securities and real estate that are likely to grow in value. Families can base a limited partnership on an investment partnership. In some cases, however, the arrangement would be considered an investment company, and gains and losses will be realized on the transfer of property to the partnership. Normally, under partnership rules, gains and losses are not realized when transferred to the partnership.
Seek Professional Guidance
The benefits of the family limited partnership can be significant. But they can only be realized if the arrangement is valid under the requirements of the IRS. There are costs and expenses associated with the creation of these legal instruments. Consult a qualified legal or tax advisor if you think your family could benefit from a family limited partnership.
How Can I Benefit from a Wealth Replacement Trust?
Charitable giving can be a rewarding experience by allowing you to both give and receive. To enjoy the benefits of charitable giving, you can utilize a variety of strategies.
The Basics of Charitable Remainder Trusts
To establish a charitable remainder trust, you transfer appreciated property to an irrevocable trust and designate the charity of your choice as the beneficiary of the trust. The property within the trust is then sold and reinvested to provide income. You retain a lifetime interest in the income generated by the trust, and when the trust expires at your death, the property within the trust is transferred to the charitable organization.
You are entitled to a current income tax deduction for the charitable gift, subject to certain limits. And because the property was sold within the charitable trust, you will not have to pay tax on any capital gains. This enables the full value of your property to be reinvested, which will increase the income generated by the trust. It also enables the charity to receive a larger gift.
If you have heirs, charitable remainder trusts have one major drawback: When the charitable trust terminates, the property within the trust is transferred to the charitable organization — rather than to family heirs. So while the charitable remainder trust offers many benefits, this strategy can effectively disinherit your heirs.
Replacing Gifted Assets
One effective solution to this situation could be a wealth replacement trust.
To create a wealth replacement trust, you use a portion of the income from a charitable remainder trust to buy a life insurance policy. You decide how much of the charitable gift to replace. You can buy enough insurance to replace only a portion of the property that will eventually pass to charity, or you may prefer to replace all of the property within the charitable remainder trust.
The wealth replacement trust is often designed so that upon the death of the second spouse, the death benefit of the life insurance policy goes to your heirs. These funds replace the property that passes to the charity from the charitable remainder trust.
And because the life insurance policy is owned by the trust, the proceeds of the policy will generally not be subject to estate taxes at either death.
An Appropriate Strategy?
If this strategy sounds interesting to you, there are a variety of considerations. The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely there may be surrender charges and income tax implications. Before implementing this strategy, it would be prudent to make sure you are insurable.
In many cases, the wealth replacement trust could be an appropriate way to preserve family wealth.
While trusts offer numerous advantages, they incur upfront costs and ongoing administrative fees. The use of trusts involves a complex web of tax rules and regulations. You might consider enlisting the counsel of an experienced estate planning professional and your legal and tax advisors before implementing such strategies.
How Can I Benefit from a Charitable Remainder Trust?
Sometimes it takes tough economic times and natural disasters to unite and bring out the best in people. Natural disasters such as hurricanes and earthquakes have served to bring communities together and impact the nation as a whole. Americans have given generously to rebuild communities and help local residents through these difficult situations.
Many people have also responded to tragedies worldwide or have made donations to wildlife and environmental charities. And when we give, most of us simply give from the heart and do not always consider the financial implications.
In many instances, there are ways to increase your gifts. The charity can receive a more substantial gift and you can increase your tax benefits. The charitable remainder trust is a popular estate-planning strategy that could enable you to gift an appreciated property or security and retain an interest income for you and your family.
Once your gift is put in a charitable trust, you may qualify for an income tax deduction on the estimated present value of the remainder interest that will eventually go to charity. Neither party will owe taxes on this transfer or upon the appreciation of the asset. The trust will usually sell the asset and reinvest the proceeds in an income-producing investment. You can receive this income in exchange for gifting the ownership of the asset to the charity.
You will then need to decide how you would like to receive income. You can receive either a percentage of the value of the trust or a fixed amount. With a percentage allocation, your income will vary based on the current value of the trust. Some even offer a “make-up” clause. If the trust is not able to provide the designated income for one year, the shortfall will be added to the following year’s distribution.
Trusts that provide a fixed amount each year will not be able to take advantage of future growth or higher earnings of the asset, but they do offer consistent income even in a stagnating market.
Choosing a trustee and clearly stating your intentions in the trust document and to the trustee are of vital importance. Once the trust is in place, it is an irrevocable instrument. Even if the charity does not receive any benefit for several decades, it will eventually assume ownership. In the meantime, the trustee is in charge of controlling the assets in the trust. Choose someone who knows how to handle financial matters and who will carry out your intentions.
A charitable remainder trust may allow you to make a substantial gift to charity, avoid capital gains tax, and provide regular income for you and your family.
While trusts offer numerous advantages, they incur upfront costs and ongoing administrative fees. The use of trusts involves a complex web of tax rules and regulations. You might consider enlisting the counsel of an experienced estate planning professional and your legal and tax advisors before implementing such strategies.
Charitable lead trusts are designed for people who would like to benefit a charity now rather than later. You may have heard about some charitable trust strategies before but decided against them because you wanted to make an immediate gift to charity.
With a charitable lead trust, your gift can have an immediate impact, and you’ll be entitled to other benefits as well. These trusts will enable you to take advantage of tax benefits and still make a significant gift.
If you are accustomed to making outright contributions to your favorite charity, or if you typically sell an investment and give all or a portion of the money to charity, you may be attracted to the special advantages of using a charitable trust.
Avoiding capital gains taxes on an appreciated asset is a very appealing benefit for investors. It is also a way for charitable organizations to receive a much larger donation because they are not required to pay tax on capital gains. Once the trust is established and the assets are transferred, the trustee can then sell the assets and reinvest the funds.
You also get an immediate charitable income tax deduction based on the “life expectancy” of your gift. With a charitable lead trust, you are giving the charity the income from the asset and not the asset itself. Your deduction will be based on the rate of return the charity can expect to receive, the duration of the trust, and the IRS tables used in the calculation. Your write-off will be limited to a portion of adjusted gross income but can be carried forward to future years.
With a charitable lead trust, the income from the reinvested assets will then go to the charity. The charity will receive distributions for the duration of the trust. You may specify a set number of years or the life of you or someone else. At the end of this period, the remaining assets are paid to you or your beneficiaries, for example.
A charitable lead trust may also help reduce family squabbles over inheritance. If you were to actually gift the asset to the charity upon your death, your heirs may feel somewhat cheated. By giving income to the charity during your lifetime and having the remaining assets paid to your beneficiaries upon your death, you may avoid much of this potential controversy.
If you are interested in increasing your gift to a charity and your tax benefits during your lifetime, a charitable lead trust may enable you to accomplish your goals.
By taking the time to plan your charitable gifts, you may be able to take advantage of some special tax benefits and make charitable giving a real win-win situation.
While trusts offer numerous advantages, they incur upfront costs and ongoing administrative fees.The use of trusts involves a complex web of tax rules and regulations. You might consider enlisting the counsel of an experienced estate planning professional and your legal and tax advisors before implementing such strategies.
There are a number of different gifting strategies available for planned giving. Each has its advantages and disadvantages.
Instead of making an outright gift, you could choose to use a charitable lead trust. With a charitable lead trust, your gift is placed in a trust. The recipient of the gift draws the income from this trust. Upon your death, your heirs will receive the principal with little or no estate tax.
If you prefer to retain an income interest in your gift, you could use a pooled income fund, a charitable remainder unitrust, or a charitable remainder annuity trust. With each of these strategies, you receive the income generated by your gift, and the recipient receives the principal upon your death.
Finally, you could purchase a life insurance policy and name the charitable organization as the owner and beneficiary of the policy. This would enable you to make a large future gift at a potentially low current cost.
The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable.
As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have contract limitations, fees, and charges, which can include mortality and expense charges. Most have surrender charges that are assessed during the early years of the contract if the contract owner surrenders the policy; plus, there could be income tax implications. Any guarantees are contingent on the financial strength and claims-paying ability of the issuing company. Life insurance is not guaranteed by the FDIC or any other government agency; they are not deposits of, nor are they guaranteed or endorsed by, any bank or savings association.
Advantages
Disadvantages
Outright Gift
Deductible for income taxes
No retained interest
Charitable Lead Trust
A current gift to charity
Current income tax deduction
Pass assets to heirs at a future discount
Transfer of assets is irrevocable
If current income tax deduction is taken, future income is taxable to donor
Donor gives up use of income for life of the trust
Pooled Income Fund
Income tax deduction
Income paid to beneficiary for life
Non-income-producing assets can be converted to income-producing assets
Income is unpredictable from year to year
Income received is taxed as ordinary income
Remainder interest will usually go to only one charity
Charitable Remainder Unitrust
Current income tax deduction
Avoids capital gains tax on appreciated property
Reduce future estate taxes
Transfer of assets is irrevocable
Qualified appraisal generally required
Complex administration and setup
Charitable Remainder Annuity Trust
Income tax deduction
Avoids capital gains tax on appreciated property
Fixed income
Fixed payment cannot be limited to the net amount of trust income
Qualified appraisal generally required
Complex administration and setup
Gifts of Insurance
Current income tax deduction possible
Enables donor to make a large future gift at small cost in the future
May require annual premiums
In some cases the death benefit could be part of donor’s taxable estate
While trusts offer numerous advantages, they incur upfront costs and ongoing administrative fees. The use of trusts involves a complex web of tax rules and regulations. You might consider enlisting the counsel of an experienced estate planning professional and your legal and tax advisors before implementing such strategies.
Married couples have several ways to potentially avoid any estate tax liability when they leave assets to each other.
Because of the unlimited marital deduction, no estate taxes are due when one spouse dies and leaves his or her assets to the survivor (as long as the surviving spouse is a U.S. citizen). However, this may merely postpone taxes that would be due until the death of the second spouse. Federal estate taxes would be owed on the portion of the estate that exceeds the applicable estate tax exemption ($5.45 million in 2016).
One basic method to maximize the exemption for both spouses has been an A-B trust (also known as a bypass trust), which preserves the estate exemption of the first spouse to die and also enables the last-surviving spouse to utilize the exemption — essentially doubling the amount exempted from the estate tax.
However, with enactment of the American Taxpayer Relief Act of 2012, some couples may no longer need an A-B trust to maximize the estate tax exemption for both spouses. But before you make a decision about the use of a bypass trust, there are a number of issues to consider.
First, a little background on the changes in the estate tax as a result of the American Taxpayer Relief Act of 2012. The law permanently extended the higher applicable exemption amount ($5 million, indexed for inflation after 2011) and raised the federal estate tax rate to 40 percent from 35 percent. The increased threshold alone eliminates many people from being subject to the federal estate tax. The act also made permanent “portability” of the exemption to the surviving spouse, which allows surviving spouses to use their spouse’s unused exemption plus their own, enabling a couple to exempt up to $10.9 million from federal estate taxes in 2016.
However, many states have their own estate or inheritance taxes, or both, and only one state (Hawaii) currently has any portability provisions. This means that when married couples leave all their assets to their spouses, the surviving spouse will be able to use only his or her state estate tax exemption. A trust may preserve a married couple’s state estate tax exemption. Additional considerations favoring a trust are the ability to shelter appreciation of assets placed in the trust, to protect assets from creditors, and to benefit children from a previous marriage.
How an A-B Trust Works
Using a living trust with an A-B provision (aka A-B or bypass trust), you ensure that both you and your spouse can take advantage of the exemption — once upon the death of the first spouse to die and then again upon the death of the second spouse.
When the first spouse dies, two separate trusts are created. The assets of the surviving spouse are transferred to the A trust, and an amount up to the estate tax exemption of the deceased spouse’s assets is transferred to the B trust. This then creates two taxable trusts, each of which is entitled to use the exemption.
The B trust is subject to estate taxes. However, because of the applicable exemption, no taxes will be owed. The surviving spouse maintains control of the assets in the A trust and receives income from the B trust. Then, upon the death of the second spouse, only the A trust is subject to federal estate taxes because the B trust was taxed at the first death. After the death of the surviving spouse, the B trust can continue for the benefit of the grantors’ family, often the children. The trust assets can be divided into separate equal trusts for the benefit of the grantors’ children, who will receive net income; and then, at some specified age, they will receive the principal.
There are many considerations involved with A-B trusts, including upfront costs and administrative fees. As the use of trusts involves a complex web of tax rules and regulations, you should consider the counsel of an experienced estate planning professional and your legal and tax advisers before implementing such strategies. However, the A-B trust can be an effective way to help reduce estate taxes and preserve family assets.
Estate taxes. It’s not enough to simply know they exist, and to know strategies to minimize them. When it comes down to it, you need to plan how you and your family will eventually pay them.
The Estate Tax Dilemma
Estate taxes are generally due nine months after the date of death. And they are due in cash. In addition to estate taxes, there may be final expenses, probate costs, administrative fees, and a variety of other costs. How can you be sure the money will be there when it’s needed?
Estate Tax Options
There are four main sources of funds to pay estate taxes. First, your current savings and investments. You or your survivors can use savings and investments to cover the costs of estate taxes, probate fees, and other expenses. This is often a sound alternative. However, sometimes savings and investments may not be sufficient. And if those savings were earmarked for other financial goals, you may need to rethink how you will achieve those goals.
Another option would be to borrow the money. Unfortunately, with this option you not only have to pay the estate taxes, but you or your survivors will be forced to pay interest on the amount borrowed to pay estate taxes. Remember to consider how your family’s credit standing will be affected by a death in the family.
The third option involves liquidation. If estate taxes are larger than the cash available to pay them, you may have to sell valuable assets such as the family home, the family business, or other assets. Hopefully, they will sell for what they’re worth. In many cases, however, they don’t.
The fourth option — one that is often a prudent way to pay estate taxes — is life insurance.
What Can Life Insurance Provide?
Life insurance can provide a timely death benefit, in cash, that can be used to pay estate taxes and other costs. And it will be paid directly to the beneficiary of the policy, without being subject to the time and expense of probate.
Granted, life insurance does require premium payments. However, if appropriate to your situation, life insurance premiums can be looked at as a systematic way of funding future estate taxes. You get guaranteed liquidity and a death benefit that is generally free from federal income taxes. Indeed, the financial protection provided by life insurance can be invaluable to those who have the burden of paying estate taxes — your loved ones.
The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance. Before implementing a strategy involving insurance, it would be prudent to make sure you are insurable. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications. Any guarantees are contingent on the financial strength and claims-paying ability of the issuing company. Before you take any specific action, be sure to seek professional advice.
Coping with estate taxes may be a difficult proposition for you o1r your survivors. When it comes to paying them, consider life insurance. It may be a strategy worth considering, and overlooking it could be costly.
There are a number of ways your estate can be distributed to your heirs after your death. Each allows a different degree of control over distribution, and each poses different challenges and opportunities. If you haven’t taken steps already, it’s important to consider planning now for the distribution of your assets.
Intestacy
If you die without a will, it is called dying “intestate.”
In these situations, the probate court will order your debts paid and your assets distributed. Unfortunately, your assets will be distributed according to state law. Since the state doesn’t know your preferences, the probate court may not distribute your assets according to your wishes.
Because intestacy is settled in the probate court, your heirs may have to endure a long, costly, and public probate process that could take six months to a year or more. They will have to wait until the probate process is over to receive the bulk of their inheritance.
And depending on the state, probate fees could consume more than 5 percent of your gross estate.
Wills
A will is your written set of instructions on how you would like to distribute your estate upon death.
While using a will guarantees probate, it is a more desirable alternative than intestacy.
In a will, you can name a “personal representative” of your estate. This person or institution (e.g., a bank or trust company) will act as the executor and will be appointed to carry out your wishes according to your testament. You can also nominate a guardian for your minor children and their estates. Without such a nomination, the court can appoint a guardian based on other information, often depending upon who volunteers.
A will can also set forth the terms of a trust of which you have named a trustee who can manage the assets for the benefit of the beneficiaries. This is often referred to as a “testamentary” trust because it is created as part of the last will and testament and comes into being at the probate of the will.
Trusts
A trust is a legal arrangement under which one person, the trustee, manages property given by another party, the trustor, for the benefit of a third person, the beneficiary. Trusts can be very effective estate planning tools.
Trusts can be established during your life or at death. They give you maximum control over the distribution of your estate. Trust property will be distributed according to the terms of the trust, without the time, cost, and publicity of probate.
Trusts have other advantages too. You can benefit from the services of professional asset managers, and you can protect your assets in the event of your incapacity. With certain types of trusts, you may also be able to reduce estate taxes.
If you use a revocable living trust in your estate plan, you may be the trustor, trustee, and beneficiary of your own trust. This allows you to maintain complete control of your estate.
While trusts offer numerous advantages, they incur upfront costs and ongoing administrative fees. These costs reduce the value of future probate savings.The use of trusts involves a complex web of tax rules and regulations. You might consider enlisting the counsel of an experienced estate-planning professional before implementing such sophisticated strategies.
Joint Ownership
Another way to distribute your estate is through jointly held property — specifically, joint tenancy with rights of survivorship.
When you hold property this way, it will pass to the surviving co-owners automatically, “by operation of law.” Because title passes automatically, there is no need for probate.
Joint tenancy can involve any number of people, and it does not have to be between spouses. “Qualified joint tenancy,” however, can only exist between spouses. In common law states, this arrangement is generally known as “tenancy by the entirety.” Qualified joint tenancy has certain income and estate tax advantages over joint tenancy involving nonspouses.
How you hold title to your property may have substantial implications for your income and estate taxes. You should consider how you hold title to all of your property, including your real estate, investments, and savings accounts. If you’d like to know more about how the way you hold title may affect your financial situation, consult a professional.
Contracts
The fifth and final way to pass your property interests is through beneficiary designations.
If you have an employer-sponsored retirement plan, an IRA, life insurance, or an annuity contract, you probably designated a beneficiary for the proceeds of the contract. The rights to the proceeds will pass automatically to the person you selected. Just like joint tenancy, this happens automatically, without the need for probate.
It is important to review your employer-sponsored retirement plan, IRA, life insurance, and other contracts to make sure your beneficiary designations reflect your current wishes. Don’t wait until it’s too late.
Many Considerations
There are a variety of considerations that will determine the distribution methods that are appropriate for you. For example, you must consider your distribution goals. By examining your situation and understanding how your assets will pass after your death, you may be able to identify the methods that will help you achieve your goals most effectively.
Likewise, the larger your estate, the more you may want to consider using a trust to help guide your estate distribution. In addition, you will have to consider any special situations you may have — such as a divorce or a disabled child. All these are important considerations.
