Contrary to popular belief, Estate Planning is not just for the ultra-wealthy. Everyone can and should consider this type of planning.

Your estate includes everything you own, from your home and car to your savings and investments, life insurance and social media passwords. An estate plan is a set of documents that lets you choose who will manage your assets and make medical decisions for you if you become incapacitated. Reach out to Pacific Crest Wealth Management for expert assistance.

Estate taxes are levied on the value of a deceased person’s estate upon death, and they’re one of the major considerations for those who plan to leave behind a significant amount of wealth. The good news is that the top rate is relatively low, and heirs typically shield a large percentage of an estate’s remaining value from taxation through generous exemption levels and discounts.

A decedent’s taxable estate is a snapshot of all of his or her assets at the time of death, and it includes cash and securities, real estate, life insurance policies, trusts, annuities and business interests. The taxable estate does not include any debts or mortgages, however, and the value of each item is determined using fair market values rather than their original cost.

During the planning process, care is taken to ensure that any income tax ramifications of decisions are considered. This is particularly important for those who transfer ownership of a business to family members, as doing so can compromise the favorable passthrough tax treatment provided by the Internal Revenue Code.

For example, if a family member inherits ownership of an operating business, the participation rules in IRS Form 706 may impact whether losses can be deducted from the business’s income. While case law supports such deductions, the IRS has indicated that it could potentially issue regulations in this area. As such, it is essential to carefully consider the participation rules when transferring business ownership and consult with a knowledgeable professional before making any changes.

Gift Taxes

As you go about estate planning, you may consider gifting assets to save taxes. However, before you do this, make sure that you understand how gift taxes work and what their implications are. A financial professional or wealth manager can help you set up structures to avoid gift tax penalties. In general, a gift tax is imposed on the giver for gifts made in excess of certain limits and thresholds. It can be calculated based on the fair market value (FMV) of a gift on the date that it is given to the receiver. This can include a bond, a share of stock in a public company or privately held shares, real estate or other assets such as artwork and collectibles. For these items, a qualified valuation expert will be needed to determine their value.

In general, most people do not pay gift taxes, especially if they use a technique known as a Crummey power. For example, if you are giving money to your spouse or children as a means of support, it is generally exempt from the gift tax. Similarly, if you are paying directly for tuition or medical expenses for another person, it is also usually exempt. However, most monetary exchanges that do not meet the above criteria are fully taxable.

The annual gift tax exemption is currently $17,000 per giver, per recipient. Any amount that you give above this limit must be reported on a gift tax return. The amount that is gifted over the annual exemption is subtracted from your lifetime gift tax exemption. However, you should not worry about this if you make regular gifts and use proper planning techniques.

Inheritance Taxes

An inheritance tax is levied on property, investments and/or money that heirs receive after someone’s death. The taxes can be a significant impediment to passing on assets. Since only six states currently impose them (and they’re expected to reduce to five), some people relocate or work with their advisors to find ways around these fees. One common strategy is to set up a revocable trust while you’re alive. This is typically paired with a will that directs all probate assets to the trust for management and distribution to beneficiaries after death. This way, you can avoid gift and estate taxes while retaining complete access to and control of your assets during your lifetime.

Another strategy is to remove assets from your taxable estate by giving them away during your lifetime. The value of your gifts is generally not taxable under the federal estate and gift taxes, but they may be in some cases in the state where you live. For example, New York has a state-level gift tax, but it’s not imposed on transfers from a living person to a trust that’s properly established and managed.

A third approach is to establish a generation-skipping trust, which can help you minimize federal inheritance taxes. The IRS defines a “skip” as the inclusion of an asset that passes from you to your grandchildren, rather than your children. The generation-skipping trust can also help you avoid a transfer penalty that might otherwise apply if you use the annual gift tax exclusion to give assets directly to your grandchildren.

Trust Funds

Trust funds are an integral part of many people’s estate planning, allowing them to limit their tax liability in ways that may not be possible through a traditional will. They are available for a number of purposes, and it is best to consult with a legal professional to determine what type of trust will best meet your needs and goals.

The grantor of the trust, who is typically the person who set up the fund, will decide how and when assets will be distributed to beneficiaries. These options may include a lump sum payout, installment payments, real estate property deed transfers, physical item transfers and more. Trusts can be revocable or irrevocable, and different types of trusts exist for specific purposes, including protecting assets from creditors, providing for individuals with special needs, avoiding probate and more.

There are monetary and time costs associated with setting up and managing a trust, but they can provide peace of mind and tax benefits that are not available through a will. Moreover, while some people think trusts are only for the wealthy, there is no minimum net worth required for creating one.

If you are interested in learning more about trust funds, talk with your employer’s human resources representative or contact a legal services benefit expert at your company. They can help you navigate your options and ensure that your estate plan is fully in place and up to date. They can also help you find an attorney if your employer offers a legal insurance benefit, which provides access to a network of lawyers for a monthly fee. The more you plan, the better chance your family and loved ones will receive the inheritance you’ve worked so hard to provide for them.

Wills

A will is an important document that allows you to decide how your estate should be distributed upon your death. It also lets you name guardians for children and any pets you might have. It can also specify healthcare directives, such as how you would like to be treated if you are terminally ill.

If you don’t have a will, your state’s laws will determine how your assets are distributed and who gets custody of your children. This can result in expensive legal battles and family disputes. It also means that your estate might end up paying unnecessary taxes.

When you make a will, it’s important to include all of your assets and debts. You can do this by putting together a list of everything you own, including bank accounts, stocks, real estate and other personal property. This will help your executor understand the value of your estate and determine if any taxes are due.

You should also list any beneficiaries who you want to receive your assets. This could be a spouse, children, friends or other relatives. If you’re leaving cash, you should include instructions on how and when the executor should transfer it. This can be done through a letter of instruction that’s kept with your will.

If you have minor children, it’s essential to include a provision in your will that creates a trust for them. This will let the executor manage your child’s inheritance until they are old enough to handle it. You can also include specific instructions about when they should receive certain assets, such as when they finish school or get married. If you need to update your will, it’s best to consult a lawyer or use an online will maker.