One of the great benefits of being a California resident is that the state does not currently have an estate tax in place. Some lawmakers want to change this but, so far, have not been successful. If they do become successful, your beneficiaries could suffer. Multimillionaires’ beneficiaries in Palm Desert could find themselves paying up to 40% of their inherited assets in taxes to the federal government – an exorbitant percentage.
With a tax rate this high, is it any wonder that so many residents turn to our Palm Desert estate tax planning and trust litigation attorney at Bochnewich Law Offices for assistance? We work with you to get a full financial picture and then use this information to create strategies that help you minimize the taxes levied on your estate by the federal government.
What Are Unified Transfer Taxes?
Some tax professionals say that “estate taxes” and “inheritance taxes” can become misleading. This is because it is not the literal estate that the government taxes. Instead, it levies taxes on the transferal process as assets pass from one entity to the next. In fact, estate taxes represent only one piece of the puzzle. The full group of applicable taxes is often called the Unified Transfer Taxes by tax professionals. This also includes generation-skipping transfer taxes and gift taxes, as well as related exemptions.
Generally speaking, only America’s wealthiest one percent need to worry about estate taxes. When it comes to federal estate taxes, people who make less than $5 million began to receive an exception in 2010. In 2017, this increased to $5.49 million per individual. However, a married couple may receive a $10.98 million exemption if the first spouse to pass away meets certain requirements. The surviving spouse could also elect for “portability” to inherit the deceased’s spouse’s tax planning strategies.
Your Palm Desert civil and business attorney may help you lower your 40% estate tax rate by encouraging you to take advantage of the lifetime gift tax exemption. Unfortunately, the annual amount is low, which is one of the many reasons early planning is so important. The federal government provides an annual exemption of $15,000 for individuals and $30,000 for couples. Combined with estate taxes, the lifetime exemption is $11,580,000 for individuals and $23,16,000 for couples.
Generation-Skipping Transfer Taxes
If you decide to leave assets to grandchildren or other families belonging to two generations and earlier, your estate pays up to 40% in taxes. However, to make up the combined exemptions of $11,580,000 for individuals and $23,16,000 for couples, you may be able to include these transferred assets. Note that you can also take advantage of this exemption by transferring assets to someone not related to you who is at least 37.5 years younger.
What Are Some Common Estate Tax Planning Tools?
The exact estate tax planning strategies your Palm Desert attorney recommends will depend on your financial situation. This includes not just your net worth but also how much money you make, the sources of your income stream and how you plan to distribute your financial assets.
From there, your lawyer will determine what exemptions you become eligible for, how much of them you need and how to use as much of these over time as possible. Here are some of the primary tools we may recommend:
- Asset gifting
- Limited liability companies or partnerships
- Life insurance trusts
- Dynasty trusts
- Land trusts
- Grantor retained annuity trusts
Why Should People Update Estate Tax Plans?
Laws governing inheritance and taxation are constantly changing. The most recent changes of any significance took effect at the start of 2018 due to the Tax Cuts and Job Acts. Since then, several of the monetary exemptions have increased and may continue to do so. However, some of the current exemptions should revert to previous figures at the start of 2025. Not surprisingly, taxation is one of the main reasons you should update your estate tax planning strategy.
Another good time to review your plan is if you experience a drastic income change. Say, for instance, that the family business takes a big hit and you are no longer bringing in several million dollars in profit per year. You may decide to reconsider how much money you gift for this and succeeding years until your business recovers. You may even choose to retire and then review whether you need any further ongoing estate tax planning strategies at all.
Family changes can also lead to the need to update tax planning strategies. If you divorce, your estate may now see its exemption cut in half. Other family changes that could cause you to revisit your estate tax plan include losing family members or gaining new ones. For example, the birth of a grandchild can provide the opportunity for you to take advantage of generation-skipping transfer tax exemptions.
WHAT IS THE DIFFERENCE BETWEEN WILL AND ESTATE PLANNING?
There are many ways you can prepare for the end of your life, including will creation and estate planning. Unfortunately, many people conflate these two processes when they pertain to different things. A will is typically a component of a larger estate plan. While your will can outline your wishes for disbursing your property after your death, an estate plan can go much further.
Whether you are simply creating a will or developing a more comprehensive estate plan, the goal of any type of estate planning is to limit uncertainty for one’s surviving loved ones after their death. Every state has unique laws for handling probate proceedings and inheritance determinations for deceased residents. Creating a more detailed estate plan rather than a simple will typically yield the best results, especially for individuals who control substantial property and assets.
A will can outline who you wish to receive specific pieces of property after you die. For example, if you want to leave family heirlooms to your grandchildren, your will can dictate which grandchild receives what items. Your will can also outline what to do with remaining personal property such as your home, vehicle, bank accounts, and valuable possessions.
An estate plan goes much further than a standard will. An estate plan will certainly outline property distribution, but it will also cover as many other subjects as the creator desires. A few of which include power of attorney designations for their financial matters and medical care options if they become incapacitated. They could also include living trusts that ensure loved ones do not need to undergo exhaustive probate proceedings to distribute your property after your death.
SHOULD I HAVE A WILL OR A TRUST?
Both wills and trusts are essential components of estate plans for countless Americans, but they accomplish different things. A will effectively acts as guidelines for the probate court to follow as they distribute a deceased person’s remaining assets and property to their loved ones. This document does not take effect until the creator’s death or until criteria stipulated within the will are objectively met.
A trust is a more in-depth document that protects your property’s ownership rights, but it takes effect upon creation before probate proceedings have begun. A trust places ownership of your assets and property in the care of a designated trustee. This means that if you die while the trust is in effect, your trustee assumes ownership of the property contained in the trust with instructions for disbursing it to your beneficiaries. The only real downside to drafting a trust is that the process of creating it tends to be expensive, but most find it well worth the peace of mind it offers.
WHAT SHOULD NEVER BE INCLUDED IN A WILL?
Many people operate under the misconception that a will contains all of a person’s instructions and wishes to be fulfilled after their death. The reality is that a will can only dictate certain things, such as property distribution. There are a few things you should not include in your will, including:
- Funeral and burial preferences. It’s not uncommon for people to have specific wishes for their remains after death. You can discuss these plans with your family and even have an attorney draft a written record of your funeral and burial preferences, but your will is not the place to record them.
- Digital account information. Modern Americans have many different digital accounts for streaming entertainment platforms, subscription services, digital memberships, and much more. This is another thing that you should discuss privately with your loved ones rather than record it in your will.
- Jointly held assets. If you and another person jointly control an asset, you cannot include instructions for what to do with it after you die. In almost every case, when a joint owner dies, ownership transforms into the survivor’s sole ownership. You can make private arrangements for jointly held property if your co-owner is agreeable, but these preferences shouldn’t be included in your will and are unlikely to be enforced if they are.
- Life insurance and retirement fund payouts. Accounts like these require you to assign beneficiaries when you create them. Your will can dictate that your beneficiary designations for these accounts be followed, but you cannot include instructions that run contrary to existing beneficiary designations. Your attorney can help to ensure that your beneficiary designations in your estate plan match those you have already assigned to your various accounts.
- Illegal requests or gifts. In the event you happen to be sitting on a stockpile of illegal weapons and narcotics at the time of your death, you cannot include instructions for disbursing such items in your will. You also may not include instructions for your surviving loved ones or beneficiaries to commit illegal acts to obtain property.
These guidelines can help you determine what you should and should not include in a will. If your Palm Desert estate planning attorney recommends that you exclude specific elements in your will but you believe they must be addressed, call our firm. Your attorney can help you craft a more robust estate plan that accounts for as many variables as possible beyond what a standard will allows.
DO I REALLY NEED AN ESTATE ATTORNEY?
If you take the time to search online, you will probably find many different “free” tools and programs you can use to create your own estate plan. In some cases, using such a tool to create a working copy of an estate plan can streamline your interactions with a Palm Desert estate planning lawyer and potentially expedite the creation of your estate plan. However, you should remember that it is unwise to try and create an estate plan entirely on your own without legal counsel.
Using free software to create an estate plan could amount to a good exercise in thinking about how you would like your family to handle your death. However, an estate plan created without professional legal guidance will be incomplete, or worse, unenforceable and ineffective due to standing legal statutes of which the creator was unaware.
Instead of wasting time with ineffective free tools and software, create a reliable and effective estate plan with the help of an experienced Palm Desert estate planning attorney. Your legal team will know which documents your estate plan should contain and the best methods for accomplishing your end-of-life goals. Your choice to hire a Palm Desert estate planning lawyer can provide you with peace of mind and security for your family’s future after your death. Your attorney can also help you identify potential tax issues that could complicate your family’s probate proceedings, some of which you would have likely missed on your own.
What Are Some Additional Considerations?
Aside from the more obvious unified transfer taxes, there are other monetary obligations that can begin to eat into the inheritance you leave behind for heirs. These monetary obligations do not only affect the wealthy. They can impact people from all backgrounds in California. Here are some of the most common:
- Probate fees for assets that pass through the California probate process
- Debt repayment to creditors, such as mortgages and car loans
- Lawyer fees if heirs decide to contest estate plan documents in court
- Income taxes to the federal government and California
How Do You Start the Estate Tax Planning Process?
We review your case and then assign a lawyer to help you work through the finer details of your estate tax planning strategy. If you have hired a financial advisor, you may wish to include him or her in the process. Your financial advisor, accountant or tax preparer may also be in the best position to provide the attorney with all the documentation needed to make solid recommendations and finalize key decisions.
We can also work with you to create a more holistic California estate plan so that you cover all your bases, not just your taxes, such as creating a will or living trust. The first step is reaching out to the Bochnewich Law Offices serving the Palm Desert area. Give us a call at 866-698-6671 to get started.