Whether you consider yourself knowledgeable in estate planning matters or not, most people agree that they always want to pay as little to the IRS as possible. Despite this concept, which, to most, would seem like a fairly obvious statement, many higher net worth Americans end up destroying their net worth and their life’s savings by failing to seek guidance to avoid basic estate planning pitfalls. A few major pitfalls to avoid are listed below.
I. Failing to Know Your Federal Tax Situation
While the tax code can seem daunting, people should be aware at a minimum, that if you are single and have a net worth above $5.49M (married couples $10.98M) the amount above $5.49M will be taxed at a rate of forty percent. More specifically, be aware that the IRS wants to be paid in cash. This may seem like an obvious point, but, for example, if you have a net worth of $20M, most of which is illiquid, or in other words unable to quickly be turned in to cash, such as real estate or the value of a business, the IRS will require the estate to sell off the assets to satisfy estate taxes.
II. Forgetting About Your States Taxes
Currently, fifteen states and the District of Columbia have estate taxes. The rules for each state vary, with some providing exemptions or reduced rates for federal taxes. Be aware that in some circumstances though, this tax can be in addition to the federal estate tax.
Additionally, six states have inheritance tax. Inheritance taxes impose taxes on descendants, regardless of the size of the estate. The tax rate is based upon the relationship to the descendant (i.e. blood relatives pay lower rates than non-blood relative beneficiaries).
III. Avoiding Probate
Whether high net worth or not, many people, usually married couples, delay any estate planning or ways of looking to place their assets in vehicles which will avoid probate. Why? The usual assumption among married couples is that “we are married”, as a matter of law, their assets will go to their spouse, which is their plan to begin with. So why go through the redundant process of drafting estate planning documents? This destroys the entire point of avoiding probate.
Probate should always be avoided regardless of who a person bequests their estate to. Probate creates an open forum where your loved one’s assets will be available for the public to view. There are many examples of this happening, particularly among celebrities, for example, James Gandolfini and Phillip Seymour Hoffman. Death brings enough hardships by itself as a private matter and the probate process can only exacerbate the issues.
IV. Solutions
Generally speaking, gifting, life insurance, and the usage of trust vehicles are three examples among many of ways that one can adequately reduce one’s net worth by removing assets from a decedent’s estate, thereby lowering the tax burdens considerably. Also, should one need to pay estate tax, he or she should design a plan which provides for liquidity or cash in their estate to avoid unwanted and unnecessary sales of tangible assets.
Regardless of one’s net worth, no two person’s situations are identical and the best solution is to utilize tax, financial, and legal professionals to design the most appropriate plan for any given situation.
For further information on this topic, please contact any of the professionals at DiMeo Schneider & Associates, L.L.C.
