You may have been concentrating solely on your retirement assets up to this point since they normally represent the greatest portion of your estate. However, if you're like most individuals, you will also have other assets, such as a house and other property. So, now is the time to take stock of your other assets and figure out how to combine them with your retirement savings as part of your total estate plan.
The American Taxpayer Relief Act (ATRA) of 2012 was enacted on January 2, 2013, by President Obama. It's true what you read. The 2012 tax bill was really passed in 2013 because Congress was so dysfunctional.
Although it took a while for the law to be approved, it offered some significant advantages for individuals worried about protecting their assets from taxation. ATRA specifically has three key effects on estate tax planning.
First off, the ATRA gave some tax certainty by making the inheritance tax regulations permanent—until Congress changes their minds again—after many years of not knowing what they will look like from year to year.
Second, ATRA stipulated a highly generous exemption amount and top estate tax rate. A $5 million estate tax exemption was established under the statute, coupled with a 40% rate.
Finally, The estate tax exemption was raised to $5.43 million for both of them. Finally, ATRA invented portability, a brand-new concept for the estates. Because of the estate taxes portability provision, a surviving spouse may receive the unused exemption of a deceased spouse without engaging in any formal estate preparation. This gave married couples in 2015 estate tax protection of up to $10.86 million (2 x $5.43 million exclusion amount). More than 99% of all estates are covered by this.
By moving a decedent's unused exemption amount to the surviving spouse, married couples can leverage the ATRA's powerful portability provision to shelter substantial sums of money from estate tax with little to no estate tax preparation. However, this transfer is not automatic. A timely and accurate Form 706, United States Estate (and Generation-Skipping Transfer Tax Return, must be submitted in order to accomplish such a transfer.
Historically, CPAs and lawyers would only submit an estate tax return if the estate of the decedent exceeded the exemption threshold (ex. more than 55.43 million in 2015). That ought to be the case no more. A deceased spouse's remaining estate tax exemption will not be transmitted if a 706 is not immediately and completely filled, which might result in more estate tax being due than would otherwise be necessary upon the passing of the second spouse. This may cost a family up to $2 million in the worst-case scenarios!
If your IRA, Roth IRA, and other retirement assets, combined with me and other property, add up to an estate valued higher than the amounts described above and thus subject to federal estate tax, you need to get serious and make sure that you title and pass down your assets in a way that allows most or all of these assets to pass to your heirs estate tax-free.
If your IRA, Roth IRA, and other retirement assets, combined with your home and other property, add up to an estate valued higher than the amounts described above and thus subject to federal estate tax, you need to get serious and make sure that you title and pass down your assets in a way that allows most or all of these assets to pass to your heirs estate tax-free.
In addition to the federal estate tax, several states still have their own state estate tax. In certain circumstances, state estate tax exemptions are quite significant, approaching or matching the federal estate tax exemption of $5.43 million. However, in other states, the exemption levels are substantially lower. Obviously, you should be familiar with your own state's estate tax regulations in order to reduce the estate tax impact at the state level as well.
It is often recommended, which is why you should combine your retirement account with your total estate strategy. For example, you may desire your younger brother to inherit the construction business and your child to inherit your IRA and be able to extend it over his or her lifetime. Alternatively, you might leave your IRAs to your grandkids to maximize the stretch option and leave other assets to your spouse (assuming your spouse will have all he or she needs-you never want to leave a spouse with too little in the name of tax planning).
Estate planning is much more than just reducing or eliminating estate taxes. It is about discovering methods to leverage your overall assets into even more wealth by utilizing the tax system to retain your fortune in the hands of your family. In other words, even if the estate tax is a concern, why not take advantage of the potential to leave an estate that can be considerably larger than it is now. Life insurance is a method that can be used to accomplish this, because properly owned life insurance passes entirely tax free, no matter the value of your estate.