In the July 23rd post, you learned what an estate is, now let’s talk about the taxes. Many people do not know an asset estate return is required to be filed if gross assets, both probate and non-probate assets, exceed $11.4 million. Non-probate assets are the assets that have beneficiaries named on them like bank accounts, retirement, and investment accounts. Probate assets are items like real estate, personal property such as jewelry, furniture, vehicles, partnership interests, and paper stocks and bonds.
In order to file an asset estate return, an estate attorney should be hired. The attorney will work to get a valuation as of the decedent’s date of death completed on each asset within the estate. Obviously, an investment account or retirement account value on the date of death is easily determined. What about jewelry, vehicles, and real estate? A piece of jewelry may not look expensive but could be worth far more than the average person may know. What about a person whose house if full of antiques? Think of the Antiques Roadshow television program, how many people are stunned to learn that an antique that was thought to be worth a few hundred dollars is actually worth a few thousand or hundreds of thousands? The estate attorney will find appropriate appraisers for each item to obtain accurate valuations of each asset.
For example, Bob named beneficiaries on all his investment accounts to avoid probate, had a home, a vacation house, and a sizeable classic car collection. The attorney would obtain valuations for each asset at Bob’s date of death, including the non-probate assets. Bob’s investment accounts totaled $7.8 million, and the house was valued at $2.2 million, the vacation home at $1 million, and his classic car collection at $800,000. Bob’s asset estate is worth a total of $11.8 million. This is 400,000 over the filing requirement for an asset estate. An asset estate return is required to be filed within nine months of Bob’s date of death.
This is at the federal level. States either follow the federal estate rules or states are inheritance states. In inheritance states, tax is paid from dollar one, which can be expensive. There are currently six inheritance tax states: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Most states use a progressive scale, which means higher tax brackets for larger inheritances. The amount of inheritance tax due is based on how your heirs are related to you. Direct family members such as parents, brothers, sisters, and children inheritance tax rates are usually less than aunts, uncles, cousins, stepfamily, and even in some cases, half-siblings.
If your state follows federal estates, the filing requirement is often less than the federal requirement of $11.4 million. In New York State, our filing requirement is $5,850,000. Each state has a different filing requirement and different tax brackets.
The tax rates on an estate with assets over the $11.4 million filing requirement range from 18% to 40%. One of the common myths is to let the estate pay the taxes and then the beneficiaries do not have to. Do you want your estate to pay those kinds of taxes? You could avoid this by naming beneficiaries on accounts and potentially gifting some assets before passing to bring your estate below the $11.4 million filing requirement.
With proper estate planning, your affairs could be put in order for your loved ones and help ensure you know they are taken care of when you are no longer here to care for them. Estate planning can also help you retain more assets for your loved ones and not lose up to 40% to taxes. If Bob had chosen to use a gifting strategy staying under the annual exclusion amount and gifted his classic car collection to his children, nieces, and nephews before his passing instead of waiting to distribute them after his death, he would have been under the federal filing requirement as his asset estate would have totaled $11 million. Bob could have gifted his vacation home to his kids before his passing as he was no longer physically capable of taking care of or getting to the property any longer, again this would have brought the value of his estate below the federal filing requirement and potentially saving some tax dollars that could pass to his heirs.
Contact your financial planner if you have one if you do not have a financial planner, now may be the time to consult one to get a plan in place that works for you and your loves ones. Setting plans up while living lessens the burdens on your loved ones and allows them to grieve with hopefully a little less stress!