King & Wood, P.A.

Will My Family Need to Pay an Estate Tax?

“In 2024, the federal estate tax ranges from 18% to 40%, depending on how much the value of the estate exceeds the current exemption limit of $13.61 million.”

Known as the “death tax,” an estate tax is applied to assets inherited by others when you die. In addition to the federal tax, twelve states and the District of Columbia have their own estate taxes, says a recent article from CNBC, “What is estate tax and who pays it?”

Inheritance taxes and estate taxes are often confused. A beneficiary pays inheritance taxes, while estate taxes are paid from the decedent’s estate before any remaining property or assets are distributed to heirs.

One of the executor’s duties is to file an estate tax return. The value of the assets is usually determined by their fair market value.

The unlimited marital deduction means the surviving spouse is exempt from federal estate taxes.  However, the second spouse to die’s estate will need to pay estate taxes.

The current federal estate tax exemption ranges from 18% to 40%, depending on how much the estate is over $13.61 million. This historically high number will revert to $5 million (indexed for inflation) on January 1, 2026.

Twelve states and the District of Columbia impose their own estate taxes. These include Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Connecticut and Vermont have flat estate taxes. However, most estate tax rates increase with the total value of the assets.

An experienced estate planning attorney will help identify strategies to minimize or avoid paying estate taxes altogether. For instance, if you leave assets to a qualifying charity, that amount is deducted from the gross estate before taxes.

Gifting is a frequently used means of minimizing estate taxes. In 2024, you can gift up to $18,000 per individual without paying the federal gift tax and without the gift counting towards your lifetime gift exemption of $13.61 million. A married couple may give up to $36,000 tax-free combined.

Irrevocable trusts transfer control of an asset from the grantor to the beneficiary, protecting it from creditors and reducing the estate's value. While rules vary from state to state, irrevocable trusts typically may not be amended, modified, or terminated without the beneficiary's consent.

Contributions can also be made to 529 educational plans, which offer tax-free earnings and withdrawals for educational expenses. They are excluded from the taxable estate. However, the contribution can’t be more than $18,000 per year, or it will be subject to the gift tax. Each state sets its own contribution limits per beneficiary.

Most Americans don’t have to pay federal estate taxes. Still, many state taxes have lower exemption levels, so speak with your estate planning attorney to learn your estate’s tax liability and consider how to minimize it for your heirs.

Reference: CNBC (Feb. 17, 2024) “What is estate tax and who pays it?”

Does Your Estate Plan Include Digital Assets?

“There are some cases in which people find that they might, under the law, have only a lifetime lease on an asset they created.”

Few people are planning adequately for the ownership transition of digital assets, which range from social media profiles, digital artwork and online-only businesses to cryptocurrency. When it comes to planning, the complexities of traditional estate planning are present but are made more complex by the nature of the digital world, according to an article from Think Advisor, “Why So Many Estate Plans Are Out of Date: Jaime Hopkins.”

Most Americans own some form of digital assets, even something as simple as a LinkedIn commentary video or as complex as lucrative social media profiles. Nevertheless, most trust documents, powers of attorney and wills have not been updated since the creation nearly ten years ago of a set of rules enacted under the Revised Uniform Fiduciary Access to Digital Asset Act, known as RUFADAA. Since the law came into existence, it’s been passed, or a version has been passed in most states.

RUFADAA requires estate planning documents, including wills and powers of attorney, to be very specific about the language used in giving various parties access to or ownership of digital assets upon the death of the original owners. The owner must provide specific directives as to their wishes.

The ownership of digital assets is rarely straightforward. In many cases, people only have a lifetime lease on an asset they created based on the contract made with the digital platform. Even a widely popular and income-generating social media account may belong to the digital platform, with only the data belonging to the original owner.

One place to start is reviewing the Terms of Services agreements. Everyone reflexively clicks on these long content screens when creating a new account. Most people don’t realize these are binding contracts setting forth the terms of ownership.

For digital assets to be part of an estate plan, they’ll first need to be identified and inventoried, including their location on the web (URL), usernames, passwords, and if they use two-factor authentication requiring access to a cell phone or personal computer.

Create a disposition plan. If the asset has value, do you want to leave it to someone, have an executor shut it down, or delete certain assets first and then shut down the account?

Review all your estate planning documents with an experienced estate planning attorney to ensure that your documents are updated with directions for digital assets. Don’t include the usernames, passwords, or account specifics, just as you wouldn’t include account numbers for a bank account in your will.

Inform your executor and heirs about digital assets and your wishes for their disposition. Be sure that your executor, in particular, is comfortable with digital assets and traditional assets and is willing to manage the necessary tasks.

Reference: Think Advisor (Feb. 14, 2024) “Why So Many Estate Plans Are Out of Date: Jaime Hopkins”

Succession Planning Addresses Company Operations and Estate Planning

“There are two sides to a succession plan. One is for the operation of the company, and the other is for the ownership of the deceased owner's share.”

Business owners typically have a high percentage of their net worth tied up in the business and sometimes the real estate where it operates. What’s surprising is how little attention is often given to the succession plan, says an article from Accounting Today, “The two sides to succession plans for private businesses.”

Starting with the operational side, who will take over the business owner's work when they die, become incapacitated, or retire? If a business founder is in the weeds of the business, this is a big issue. The owner must have extensive conversations with key employees to discuss the details.

Multigenerational family ownership isn’t always the cure for a succession plan. Second- or third-generational roles must be planned, so capable people fill them. Bloodline succession doesn’t always work for running a business.

These conversations regarding roles, compensation and equity incentives must be very detailed. Not all employee leaders are willing to pour their lives into a privately owned business for the benefit of heirs without an incentive plan.

On the financial side of succession, who will become the owners of the deceased’s shares, and what financial arrangements will be made for that transfer? Businesses with the least amount of animosity and grief are those who have done the hard work: they have the business evaluated by an outside professional and having clear plans for how the successor owners will own and operate the business.

How will the transfer of the business take place in the future? An estate planning attorney should work with the business’ accountants, financial advisors, insurance brokers and other professionals to develop a clear plan for the business and the family.

If the owner is contemplating retirement, will they count on the income from the business operations to fund their retirement, or will they sell their shares to family members or outsiders? Who will oversee this transfer if the business owner becomes incapacitated?

Succession planning for a privately held business is a lengthy process requiring input from skilled professionals, and ideally, it should begin the moment the business is well-established. There’s always time to tweak an existing plan, but never time to plan in an emergency.

Reference: Accounting Today (Feb. 13, 2024) “The two sides to succession plans for private businesses”

Why Do I Need to Name an Executor?

“An executor participates in the probate process and manages assets during it. This individual has a fiduciary duty to act in the best interests of the estate. This is the highest duty owed under the law.”

When someone dies, they leave behind an estate consisting of their assets. Someone has to manage the estate property, taking on tasks like paying creditors and ensuring that assets are distributed according to the decedent’s wishes. The executor of an estate, also called a personal representative, is the person who takes on this role, as explained in the article “What Is An Executor Of An Estate?” from Forbes.

If the deceased has a last will, it includes the name of the person who serves as their executor. However, if there is no will, or if the will doesn’t name an executor, a court will appoint someone—not necessarily a family member—to serve in this role.

The executor is responsible for carrying out the wishes of the decedent, including gathering all of the important documents, including the last will, filing any required court paperwork, managing assets until they are distributed and facilitating the transfer of money and property to beneficiaries.

In most cases, assets must pass through probate, a legal process in which the court validates the will, issues letters testamentary giving the executor the right to do their job, oversees the distribution of assets to beneficiaries and ensures that creditors are paid.

If you have an estate plan created by an experienced estate planning attorney, they will ask you to choose someone to serve as your executor. This needs to be someone you can count on to fulfill your wishes, who you trust implicitly and who you know will be able to manage submitting and completing paperwork for the court, the IRS and any other government agencies.

Can a beneficiary also be an executor? A beneficiary often does serve as the executor since many people name their spouse or adult child to act as their personal representative and manage their estate after their death.

An executor has a lot to do:

• Obtaining a copy of the will, death certificate and other paperwork.
• Inventorying the deceased individual's assets, determining which passes through probate and which passes outside of probate.
• Managing the deceased's assets, such as paying the mortgage and utilities.
• Submitting the will to be probated in the relevant court.
• Notifying all parties who may have a claim against the estate.
• Overseeing the probate process.
• Paying any debts.
• Facilitating the transfer of assets.
• Filing taxes for the person’s last living year and the estate tax.

The executor often retains the services of an estate planning attorney to manage these tasks, ensuring that they are carried out properly and in a timely manner.

Reference: Forbes (Feb. 5, 2024) “What Is An Executor Of An Estate?”

Do I Need a Pour-Over Will?

“Upon your death, assets held in the living trust can transfer using the trust administration process. Assets held outside of the trust, on the other hand, would need to be addressed in some other way.”

A living trust, also known as a revocable trust, is used in estate planning to transfer ownership of assets in trusts and accomplishes several things. It takes assets out of your probate estate, while permitting you to continue to control the assets. You can be the trustee while living and of sound mind, as explained in the article “What Is A Pour Over Will?” from Forbes. The trust names a backup or successor trustee who manages the trust assets if you become incapacitated or die. The living trust includes the names of your beneficiaries, which may be individuals or charitable organizations.

When you die, assets held in the living trust are transferred using the trust administration process. Assets held (owned) outside the trust must be addressed differently. This usually means going through probate.

If you have no will, your state's intestacy laws will apply. These laws would distribute your assets to family members based on their relationship to you—kinship. This may not be what you wanted, especially if a family member is estranged from you. However, it won’t matter, and other family members will have to live with the court’s decision.

However, you can use a pour-over will to “pour over” any assets not in the trust at the time of your death into the trust after your passing. This ensures that the assets will be transferred through the trust administration as well.

When the living trust is established, assets must be retitled so the trust becomes the legal owner. But you might not do this with everything you own, or you may acquire assets after the trust is created and die before you can transfer them. You might simply forget some assets.

As you create a trust for the specific reason to facilitate effective management and transfer of property through the trust administration process, it makes sense to have all your property moved into that trust upon your passing.

An experienced estate planning attorney can help create the living trust and coordinate it with your will and instructions for all assets not otherwise accounted for to pass into the trust upon your death. You’ll need to work with an estate planning attorney to be sure the trust, will and other estate planning documents comply with your state’s laws.

An estate planning attorney can help you understand other options for transferring assets and provision for loved ones. The pour-over will is one of many estate planning tools available to protect your loved ones.

Reference: Forbes (Jan. 29, 2024) “What Is A Pour Over Will?”