An estate plan is a legal method for individuals to provide instructions on the distribution of their property and/or assets upon their death. This plan includes what is called an estate. An estate is all of an individual’s property, including:

  • Any personal items;
  • Real estate;
  • Stocks and securities; and
  • Any other assets the individual owns at death.

When an individual passes away, their estate plan provides instructions on how the property will be managed and distributed. While estate planning may sound like something only the wealthy need to be concerned with, almost everyone would benefit from having an estate plan.

An estate plan has many benefits for an individual and their family. An estate plan can minimize the tax burden on an individual’s loved ones after they pass away. A plan may also minimize the need for proceedings in probate court, which can be costly. 

An estate plan is usually associated with wills and trusts but can include other issues, including:

  • How an individual receives medical treatment;
  • An individual’s organ donation wishes;
  • Who makes legal and/or financial decisions for an individual should they become incapacitated;
  • Who cares for an individual’s minor children in the event of their death;
  • Who takes over an individual’s business interests in the event of their death; and/or
  • An individual’s desired funeral arrangements.

If an individual does not have an estate plan in place, their property and assets may be distributed according to their state’s intestate succession laws, or the laws that govern when an individual dies without a will. These laws vary by state and may result in property distribution that is not in accordance with the deceased individual’s wishes. 

In many states, the deceased individual’s property will be divided equally among the surviving family members at the first generational level and then distributed in equal shares. For example, if the individual owns a house and has no surviving spouse but two children, it is likely the home will be sold and the profits will be divided between those children in order to be fair. 

However, it may have been the individual’s wish to give the home to one child and money to another. Without a will in place, the individual’s wishes cannot be known and/or followed. Because of this, it is essential to have an estate plan in place.

What is Included in an Estate Plan?

An estate plan can include different estate planning instruments, depending on the individual’s situation. In general, an estate plan may include:

  • The will;
  • A trust or trusts; and/or
  • Power of attorney.

Not every estate plan will contain the same planning documents or have the same needs and/or issues.

A will is a legal document that allows an individual, called a testator, to provide directions regarding how their property will be distributed when they pass away. A will can include personal property and/or real property. 

A trust is a legal instrument created by an individual that appoints a trustee to hold the property of the owner for the benefit of someone known as the beneficiary. In contrast to a will, the property in a trust may be transferred prior to the death of the testator. This type of trust is called an inter vivos trust. Trusts can be created for individuals, including grandchildren, and held until they reach a specific age, such as the age of majority, and/or complete a specific task, such as graduate college.

A power of attorney is a legal document that gives one individual the power to make decisions for another individual should they become unable to do so due to injury or other reason. A power of attorney, such as financial power of attorney, provides an individual the right to do things such as pay bills, buy and/or sell property, and hire an attorney for the incapacitated individual. There are different kinds of powers of attorney, used for different reasons.

What are Components of an Individual’s Gross Estate?

When an individual passes away, their property has to be inventoried and distributed according to their will, if one is in place, and if there is no will, according to local intestate laws. If the individual has a will in place, it usually names the individual chosen to be the executor of the estate. The court appoints this executor to oversee the individual’s estate. If an individual passes away without a will, the court appoints an administrator to oversee the estate.

The executor or administrator calculates the gross estate. This is the total value of the individual’s property upon their death. Calculating the gross estate can be a complicated process, especially if the individual died with a large number of assets and/or investments.

What can be a Deduction Against the Gross Estate?

There are several things, including certain expenses and/or losses, that are allowed to be deducted from the gross estate. These include:

  • Funeral and burial expenses of the decedent, including:
    • The tombstone;
    • The monument; and 
    •  Any burial lot costs.
  • Administrative expenses of the estate paid to the executors and the trustees, including:
    • Any commissions;
    • Attorney’s fees;
    • Accountant’s fees;
    • Selling expenses; and/or 
    • Any other miscellaneous expenses for services of the estate.
  • Debts the individual owes at the time of death;
  • Taxes accrued prior to the individual’s death;
  • Any outstanding mortgages and/or other debts secured by the individual’s property should that property be included at its full value in the individual’s gross estate;
  • Interest accrued on mortgages and/or other debts up to the date of the individual’s death; and
  • Uncompensated losses from a fire, storm, shipwreck, theft, and/or other casualty. 

Estate administrative expenses can be taken either as a deduction against the estate or the income tax of the estate. Which deduction to use for the estate administrative expenses is decided by the executor or administrator.

What Is the Alternative Valuation Method for Gross Estate?

For the purposes of estate taxes, the value of an individual’s gross estate is usually determined on the date of the individual’s death. The executor, however, may choose to value the gross estate at an alternative date instead of the date of the individual’s death. 

This date is 6 months after the date of the individual’s death if the property is not sold, distributed, or disposed of within that 6 month period. If the property is sold, distributed, or disposed of during that 6 month period, the value is determined at the date of the sale, distribution, or disposition. 

What is the Benefit of Using the Alternative Valuation Method?

The alternative valuation method can provide a benefit to the estate by reducing the amount of estate taxes. This can occur if the gross estate depreciates during the 6 months following the individual’s death. 

The only drawback is that the beneficiary may receive the property on a stepped-up basis, meaning the property received may be lower than the valuation at the time of the individual’s death. This may result in substantial income tax consequences should the recipient sell the property for profit at a later date.

Under What Condition is the Alternative Valuation Method not Available?

An executor may only elect to use the alternative valuation method if it will lower both the value of the gross estate as well as the sum of the estate tax and generation-skipping tax after applying all applicable credits against those taxes. Any estate that does not owe federal estate taxes or generation-skipping taxes may not use the alternative valuation method.

When Must This Election Be Made?

The election to use the alternative valuation method must be made within one year after the due date of the federal estate tax return, including extensions. There are no exceptions to this one year rule.

Do I Need an Estate Planning Attorney?

Yes, it is important to have the assistance of an estate planning attorney for any estate planning issues. An attorney can explain local laws, assist in drafting any estate planning documents and help to ensure your property is distributed in accordance with your wishes. 

They will also be able to create a plan that limits tax liabilities to the extent possible and passes as much property to your family members and loved ones as possible.