By GS Editor

If you own assets, you have an estate.  This means that nearly everybody has an estate, whether it is small or large and therefore should have a written plan.  Without a plan in writing your state of residence will choose who receives your assets when you die.  The state’s choice may not be the result you intended. We see issues like this even in very large estates. How can you ensure your intentions will be realized? We outline three basic steps to get you started in planning:

  1. Create a will.  No matter the size of your estate, your plan should begin with a will.  A will lets spell out who gets what.  It allows you to distribute property to your chosen beneficiaries, designate guardians for your dependents, and make charitable contributions. You can also use your will to establish trusts, which are another important part of estate planning. Trusts can be used for asset management, distribution timing, and protecting the inheritance of heirs who cannot manage their own affairs. In addition, trusts can be useful to bypass the complexities of probate, the state court system governing distributions.
  2. Update beneficiary designations.  Another important planning move is to update your beneficiary designations. Some assets, such as life insurance proceeds and retirement accounts, bypass your will and go directly to the designated beneficiaries.  When you open these types of accounts, you would have filled out a form indicating who gets the account when you die.  It is worth reviewing these beneficiary designations from time to time to be sure your accounts accurately reflect your intended beneficiaries.
  3. Consider estate taxes. Estate tax applies to the excess of your gross estate over the allowable exclusion and deductions. Your gross estate is the current value (not the cost) of everything you own. The allowable exclusion for 2016 is $5,450,000, and an estate can deduct the following:

a)    Assets left to a surviving spouse, without limitation.

b)    Property left to qualifying charities.

c)    Mortgages, debts, and administrative expenses and losses.

Because property in your estate is valued at current market value, your heirs will benefit from a “step-up” in basis. Here’s an example. Say your home cost $120,000. If the value of the home is $520,000 at the date of death, then when the house passes to your heir, your heir’s basis becomes $520,000.  That means if your heir later sells the house for $600,000, the taxable gain is limited to $80,000 ($600,000 less the $520,000 value at date of death).

Your accountant can assist in starting your estate plan. They will work with your attorney as well as other members of your financial team to help you achieve the results you intend.