Asset and Wealth Protection

a blog by attorneys for individuals and businesses

What Does the IRS Include In Your Estate?

One of the first things your estate planning attorney does during your initial estate planning consultation is assess the value of your estate for estate tax purposes. The IRS includes nearly everything in this calculation, and most people are surprised at how high the government will be valuing their estate.

Your gross estate

The IRS includes in your gross estate everything you own or in which you have an interest, whether or not it is held in your name or in a revocable living trust, including:

  • Cash
  • Personal property
  • Securities
  • Real estate
  • Business interests 
  • Annuities
  • Retirement accounts
  • Life insurance proceeds on policies insuring your life if the proceeds are (1) payable to your estate or (2) for your beneficiaries if you possessed any “incidents of ownership” over the policy

Exclusions

For the most part the only assets that are excluded from your gross estate are assets that are not in your name and are outside your control. Through careful estate planning, a portion of your assets can be removed from your gross estate. For example:

  1. The proceeds of a life insurance policy taken on your life that was (1) never owned by you or (2) was transferred more than three years before your death to another adult or to an irrevocable life insurance trust of which you are not a trustee, will not be considered part of your estate for estate tax purposes.
  2. Assets transferred to an irrevocable trust such as a Grantor Retained Annuity Trust (GRAT) or Unitrust (GRUT), Qualified Personal Residence Trust (QPRT), Charitable Remainder Trust (CRT) or Charitable Lead Trust (CLT) are not considered part of your estate.
  3. Careful structuring and operation of a Family Limited Partnership (FLP) or Limited Liability Company (LLC) can enable you to transfer assets to your children over time. For example, the transfer of a partial interest in a piece of real estate that you own to an FLP or LLC (or directly to an adult child) may reduce the property’s fair market value for estate tax purposes.

Outright gifts of up to $13,000 per person ($26,000 per married couple) made during your lifetime are not only tax-free, but also reduce the size of your estate. Note that you also have the option of making gifts of any amount for another person’s medical and educational purposes so long as payment is made directly to the facility or provider. Gifts of any amount may also be made to qualified charitable organizations.

Deductions

Estate tax is the tax imposed on your assets (excepting the first $5,450,000) at the time of your death – the tax is imposed on your gross estate, minus deductions. Deductions are allowed for:

  • Mortgages on your real estate
  • Other debts remaining at the time of your death
  • Expenses of administering your estate (including funeral expenses)
  • Any losses incurred during estate administration
  • Gifts to qualifying charities in your will or trust, and
  • Property that passes outright to your spouse as a result of your death (the “Marital Deduction”).

Knowledgeable estate planning and tax attorneys in San Francisco

The estate planning and tax attorneys at Moskowitz, LLP understand the tax implications of your estate plan and can help you arrange the best way to minimize estate taxes upon your death. Contact our San Francisco office for a consultation.

Don’t Delay Your Estate Plan!

Just weeks after Prince Roger Nelson’s death (the artist formally known as Prince), dozens of people filed petitions in the Carver County District Court in Minnesota, claiming a piece of the music icon’s estimated $300 million estate. Some claimed to be his illegitimate children, others to have been adopted by him, one claimed to be a descendant of his great-grandfather, and another simply demanded a DNA test.

A probate judge is tasked with sorting out the colossal mess that is Prince’s estate, a mess that could have been avoided entirely if the Artist had an estate plan. Not to mention probate fees and estate taxes, which no doubt will cost his true heirs a small fortune and could also have been significantly reduced had Prince put together the type of estate plan warranted by his vast fortune.

A few good reasons to take care of your estate plan now

  1. YOU decide who gets what. If you don’t make the decision who gets your assets, the court will. There are many options available for the distribution of individual items, cash, real estate and business interests -- your estate planning attorney can help you decide the most efficient and cost-effective way to arrange for their distribution, through a will and/or a living trust.
  2. Providing for minor children. If your children are minors, your estate plan will also designate who will care for them and how the money you leave for them should be managed. Guardianship provisions are made in your will or living trust.
  3. Saving a significant amount of taxes and probate fees. Probate fees in California can easily reach the tens of thousands if you own even a single piece of San Francisco real estate. Probate fees can be avoided entirely with a Living Trust. Proper estate planning can also save wealthy individuals and couples significant estate taxes as well.
  4. Planning for short- and long-term incapacity. Having an estate plan isn’t just about who will get your hard-earned assets when you no longer need them, it is also about who will look after you and how you will be cared for if you become incapacitated. These provisions are made in a durable power of attorney and/or a living trust.
  5. Making end-of-life decisions. Through an Advance Health Care Directive (“Living Will”), you can provide guidance for your family and your physicians for end-of-life decision-making. Your Last Will and Testament usually specifies whether you wish to be buried or cremated.

You are allowed to change your mind!

With few exceptions (such as irrevocable trust instruments designed to minimize estate taxes for the very wealthy), all of your estate planning documents can be modified or revoked.

Estate planning attorneys in San Francisco

At Moskowitz, LLP, we consider estate planning as simply "getting organized." This helps to remove much of the stress and anxiety for our clients and helps them move forward with essential planning that will benefit them and their loved ones. Call us today to set up an initial consultation.

The Federal Estate Tax Exemption

The estate tax is a tax on the transfer of wealth. If you pass away in 2016, for example, any amount in your estate that exceeds $5,450,000 (minus deductions) could be taxed at a rate of up to 40%. Proper estate planning can therefore save your heirs a significant amount of money.

Background on the estate tax and exemption

Throughout history, estate and inheritance taxes have been enacted to provide governments with an additional source of funding and to prevent the concentration of wealth in a small number of powerful families. The current estate tax structure was initiated following enactment of The Revenue Act of 1916, and levies tax on a decedent’s estate as opposed to directly on the beneficiaries. It works by exempting a certain amount of the decedent’s net worth from estate taxes, but taxing any amount above that figure at a very high rate.

In 2001, President George W. Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001, which was designed to phase out the estate tax by 2010. The amount in a deceased person’s estate that was exempt from estate taxes subsequently rose steadily from year to year, while the maximum estate tax rate decreased:

Year of Death

Amount Exempt from Estate Tax

Max. Estate Tax Rate

2001

$     675,000

55%

2002

$1,000,000

50%

2003

$1,000,000

49%

2004

$1,500,000

48%

2005

$1,500,000

47%

2006

$2,000,000

46%

2007

$2,000,000

45%

2008

$2,000,000

45%

2009

$3,500,000

45%

 

The estate tax was repealed on January 1, 2010. However, on December 17, 2010 President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act), which reinstated the estate tax retroactively to January 1, 2010. The exemption amount was set at $5,000,000 and the estate tax rate at 35%.

Estate tax and exemptions from 2010 to the present

The 2010 Tax Relief Act gave the heirs of those who died in 2010 the choice of either accepting the reinstated estate tax and receiving a step-up in basis to fair market value under Internal Revenue Code §1014, or opting out of estate taxes altogether but not receiving the step-up in basis. Tax attorneys and accountants made careful calculations to ensure that the best choice was made for their clients. For example, Billionaire George Steinbrenner’s heirs saved roughly $600 million in estate taxes (and got to keep the New York Yankees) because Steinbrenner died in 2010 and they were able to opt out of the estate taxes that year.

Since 2010, the federal estate tax exemption amount has continued to rise steadily, while the maximum estate tax rate has somewhat decreased:

Year of Death

Amount Exempt from Estate Tax

Max. Estate Tax Rate

2010

$0 (but no step up in basis) or $5,000,000

0% or 35%

2011

$5,000,000

35%

2012

$5,120,000

35%

2013

$5,250,000

40%

2014

$5,340,000

40%

2015

$5,430,000

40%

2016

$5,450,000

40%

 

Portability of the estate tax exemption

The "portability of the estate tax exemption" was included in the 2010 Tax Relief Act to permit a surviving spouse to use any unused amount of their deceased spouse’s exemption. This means that if a married couple dies in 2016, they can leave up to $10,900,000 ($5,450,000 times two) to their heirs free of federal estate tax, without any additional tax planning. Note that both spouses must be U.S. Citizens to benefit from this rule.

State estate taxes

Currently 15 states (Washington State, Oregon, Minnesota, Illinois, Tennessee, New York, Vermont, Maine, Massachusetts, Rhode Island, Connecticut, New Jersey, Delaware, Maryland, and Hawaii) also impose estate taxes on the state level, as does the District of Columbia. Six states have an inheritance tax (Nebraska, Iowa, Kentucky, Pennsylvania, New Jersey and Maryland). Note that New Jersey and Maryland impose both. The exemption amounts vary widely and estate tax rates in some states are more than 15%.

California estate planning attorneys

The attorneys at Moskowitz, LLP, provide estate planning services for individuals and couples that can reduce or even eliminate estate taxes altogether. Contact our San Francisco office for details.