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Understanding the Basics of Estate Planning

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Understanding the basics of estate planning 1 It’s important to have an estate plan. You want to make sure the assets you’ve worked so hard to accumulate during your lifetime go to the people or organizations you care about. Estate planning can be a complex process, but you can make it easier with the support of capable, experienced professionals. This guide presents an introduction to This guide is provided for educational estate planning so that you can better purposes only and is not intended to understand what’s involved. You’ll learn be legal or tax advice. The information more about: provided was accurate at the time of publication and is subject to change • Sizing up your estate. without notice. We recommend that • Tax laws that affect your estate. you consult an estate planning attorney • The documents you’ll need. or a tax advisor to discuss how current laws apply to your situation. • Some common estate plan designs. • How your assets will transfer when you die. • Designating beneficiaries. • How to get started on your plan. Why estate planning is important Having a comprehensive estate plan in • Ensuring all of your assets, including place can help you feel more confident those that pass by beneficiary about the future and that your loved designation (e.g., retirement accounts ones will be taken care of. It can help and life insurance policies), will be you achieve a variety of goals and distributed according to your wishes. objectives, including: • Minimizing taxes and expenses. • Providing support and financial stability • Ensuring that individuals you choose for your spouse. can make decisions on your behalf in • Preserving assets for future generations. the event of your incapacity. • Supporting a favorite charity or other worthy cause. 1 Size up your estate In this section, we’ll Before you can establish a plan for your • Whom do you want to leave your help you: estate, you must first consider what financial assets to? 1. Identify your goals. you hope to achieve with any assets • Are there specific assets you’d like 2. Set a direction for you distribute. your plan. to give to specific individuals? 3. Evaluate your assets • Are you concerned about trying to to establish the What are your goals? approximate worth protect assets from a divorced spouse of your estate. Here are some questions you should ask or a beneficiary’s future creditors? yourself to help define your estate planning • If your beneficiaries are different ages, goals and objectives before meeting with are you concerned about the timing an attorney. Use the space provided to of distributions to them (e.g., second write down answers or additional thoughts marriage situations, beneficiaries of so that you can share them with your varying generations)? attorney later. • Do any potential beneficiaries have • Are you concerned about whether your specific needs that you’d like to meet? heirs have the ability to manage or • Do you need succession planning for protect your wealth? a family business? • Do any of your family members have special needs? List the objectives you have in mind for your estate 2 Evaluate your assets While you may have already given us an accounting of most of your assets, we Your estate includes everything you encourage you to complete the worksheet own or anything you could have an on page 4 and have it nearby during your interest in, including investments, such consultation. You can also keep copies of as individual stocks, bonds, and mutual this worksheet on hand to help your heirs funds; retirement accounts; your home and identify what you may own. other real estate; business interests; and personal property. It also encompasses As you evaluate your assets, here are a assets that you may not typically think couple more questions to ask yourself: of, such as life insurance policies, certain • Do you expect a significant change in annuities, certain trusts, and joint accounts your assets, such as an inheritance? you own with your spouse or with someone else. • Do you have an interest in any trusts? 3 Valuing your estate* Asset category In your name In your spouse’s name Owned jointly** Taxable accounts $ $ $ Retirement accounts Life insurance Annuities Personal residence Other real estate Personal property (cars, furniture, jewelry, artwork) Business interests Other Subtotal $ $ $ Minus debts Total $ $ $ Date **This worksheet is intended to provide only an estimate of your estate value; you should not rely on it as an exact accounting. ** Indicate if the joint owner is someone other than your spouse and if any of the assets are community property. The following states are community property states and as such have different rules for ownership and transfer upon death: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin have mandatory systems; Alaska and Tennessee have optional systems. 4 Gain insight into taxes In this section, you’ll find Now that you know your goals and you’ve executor makes an election on your information to help you: evaluated your assets, it’s important to federal estate tax return after you die. 1. Learn more about understand taxes—which could have a This transferred amount is known as the federal and state taxes that can affect significant impact on how much you pass “deceased spousal unused exclusion your estate. to your heirs when you die. amount” (DSUEA). 2. Take steps to minimize the tax Your exemption amount, in addition to any liability for your estate. Federal transfer taxes that may affect your estate DSUEA, may be used to exempt transfers during your life or on your death from There are three distinct but related federal federal estate tax and gift tax (both taxes transfer taxes: estate tax, gift tax, and are unified). But any transfers beyond generation-skipping transfer (GST) tax. these amounts may be subject to the tax All of these taxes could have an impact on rate in effect for that year. the amount passing to your beneficiaries, depending on the value of your estate. Let’s take a look at each one. Key terms Exemption amount: The amount exempt Federal estate tax from federal estate and gift taxes ($11.7 The federal estate tax may be imposed million per decedent in 2021)* and on the value of your taxable estate at the sometimes referred to as the “unified time of your death. Each U.S. decedent can credit,” “basic exclusion amount,” or transfer a set dollar amount of assets free “exemption equivalent.” of federal estate tax. This amount, known Deceased spousal unused exclusion as the “exemption amount,” is $11.7 amount (DSUEA): The portion of the million per U.S. decedent in 2021*. unused exemption amount that is portable You should note that, in addition to the and can be transferred to a surviving exemption amount, there’s also what’s spouse by election on the federal estate known as the unlimited marital deduction, tax return (IRS Form 706). where a spouse can transfer any amount of assets to a surviving spouse free of federal estate tax (special rules apply to spouses who are not U.S. citizens). It’s important to remember that for decedents who died in 2011 or after, any portion of the exemption amount that goes unused is considered transferable or portable. As detailed on the next page, the unused amount can transfer to your surviving spouse only, as long as your *Numbers adjusted for inflation annually. 5 More on portability You should also note that portability Let’s take a closer look at portability, or the doesn’t carry over to future marriages, ability to use any “leftover” amount of a a rule intended to avoid the accumulation decedent’s federal estate tax exemption of unused exemption amounts. Sticking amount, using the following example: with our previous example, review the following scenario: • A husband dies in January 2021. He’s survived by his wife, and had • A husband dies in January 2021. used only $2 million of his $11.7 million He’s survived by his wife, and had exemption amount. used only $2 million of his $11.7 million exemption amount. • The executor must elect portability on the husband’s estate tax return (IRS • The executor must elect portability on Form 706). As a result, the husband’s the husband’s estate tax return (IRS estate will have to file an estate tax Form 706). return, regardless of the estate’s value. • The wife now has a total exemption • The wife now has a total exemption amount of $21.4 million (this includes amount of $21.4 million (this includes her $11.7 million exemption in addition her $11.7 million exemption in addition to her deceased husband’s $9.7 million to her deceased husband’s $9.7 million DSUEA). DSUEA). • The wife remarries. • Her second husband dies. • Because the wife remarried and survived the second husband, her exemption amount remains $11.7 million (it doesn’t include the original husband’s unused $9.7 million DSUEA). 6 Federal gift tax Generation-skipping transfer (GST) tax This tax is imposed when you make gifts This tax may be due—in addition to the in your lifetime that total more than the estate or gift tax—at the highest federal exemption amount. estate tax rate (40% in 2021) when you transfer assets to someone who is two or Keep in mind that there are gifts you more generations from you. Remember can make that do not count against your that, if the beneficiary is not related to you, exemption amount. Using the annual the tax may be due if that person is more exclusion gift, you can transfer up to than 37½ years younger than you.
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