An estate plan is a way for individuals to provide instructions on how their property and/or assets will be distributed upon their death. This plan includes the estate. An estate includes all of an individual’s property such as:

  • Personal items;
  • Real estate;
  • Stocks and securities; and
  • Any other assets.

When an individual passes away, their estate plan dictates how the property will be managed and distributed. While estate planning may sound like a tool only the wealthy need, almost everyone can benefit from having an estate plan in place.

An estate plan can have many benefits for an individual and their family. For example, an estate plan may minimize the tax burden on an individual’s loved ones. It may also minimize the need for probate court proceedings, which can be costly to the estate. 

Estate planning is usually associated with wills and trusts but it can include other issues such as:

  • How an individual is to receive medical treatment;
  • An individual’s organ donation;
  • Who will make legal and/or financial decisions for an individual if they become incapacitated;
  • Who will care for an individual’s minor children;
  • Who will take over an individual’s business interests; and/or
  • An individual’s funeral arrangements.

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

In many states, the individual’s property will be divided equally among the surviving family members at the first generational level and distributed in equal shares. For example, if the decedent owns a home and has no surviving spouse but two children, it is likely the home will be sold and profits divided between those children. However, it may have been the decedent’s wish to keep the home in the family. Without a will, these wishes cannot be known. Therefore, it is important to have an estate plan in place.

What is Included in an Estate Plan?

Estate plans can include several different estate planning instruments, depending on the individual’s circumstances. In general, an estate plan can include:

  • A will;
  • Trusts; and/or
  • A power of attorney.

Not every estate plan will contain the same instruments or have the same needs.

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

A trust is a legal instrument wherein one individual, a trustee, holds the property of another for the benefit of an individual known as the beneficiary. Unlike a will, property in a trust may be transferred prior to the death of the testator, known as an inter vivos trust. Trusts can also be created for individuals such as 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 provides an individual with the power to make decisions for another individual should they become unable to do so. A power of attorney provides the individual the right to do things such as pay bills, buy and/or sell property, and hire an attorney for the incapacitated individual. 

What is Estate Tax Liability?

When an individual passes away, there are taxes that apply to the assets distributed from their estate. The federal gift and estate tax is a tax on an individual’s right to transfer property at their death. These taxes can be as high as 40% of the total value of the estate. 

As of 2019, the federal estate tax can be imposed on an estate by the federal government. However, this only occurs if the gross value of the estate is greater than the federal personal estate and gift tax exemption. These exemptions are large, being $11.4 million for an individual and $22.8 million for a married couple. 

Since the tax rate can be so high, it is important to ensure the gross value of the estate does not exceed the exemption amounts. The gross value of an estate may be calculated by adding the total value of all property and assets remaining at the time of an individual’s death. These can include:

  • Any and all cash; 
  • Any funds held in bank accounts; 
  • Stocks; 
  • Bonds; 
  • Any mortgages; 
  • Life insurance policies; and/or 
  • Real property or real estate. 

How do I Calculate Estate Tax Liability?

In order to calculate an individual’s estate tax liability, they must first determine the amount of their taxable estate. A taxable estate is a gross estate minus certain deductions. One example of a deduction permitted by tax laws is a deduction for certain expenses and losses of the deceased.

What are Components of an Individual’s Gross Estate?

When an individual passes away, their property must be inventoried and distributed according to either their will or local intestate laws. If the individual had a will in place, it will generally name the individual chosen to be the executor of the estate. The court will appoint this executor to handle the individual’s estate. If the individual passes away without a will, the court will appoint an administrator to handle the estate.

The administrator or executor will calculate the gross estate, or the value of the individual’s property upon their death. This can be a complex process, especially if the individual died with a large amount of assets and/or investments.

When estate planning, it is important for an individual to understand what factors into the gross estate, how deductions affect the gross estate, and the resulting tax implications. The administrator or executor must also have a working knowledge of the gross estate to ensure proper distribution after the individual’s death.

What can be a Deduction Against the Gross Estate?

There are several items, including expenses and losses, that are allowed as deductions against the gross estate. These include:

  • Any funeral and burial expenses of the decedent, including:
    • A tombstone;
    • A monument; and 
    • Burial lot costs.
  • Any administrative expenses of the estate paid to the executors and the trustees. This includes:
    • Commissions;
    • Attorney’s fees;
    • Accountant’s fees;
    • Selling expenses; and/or 
    • Other miscellaneous expenses for services.
  • Debts that the individual owes at the time of death;
  • Taxes accrued prior to death;
  • The full amount of any outstanding mortgages or other debts secured by the individual’s property if that property is included at its full value in the individual’s gross estate;
  • Interest accrued on mortgages or other debts up to the date of the individual’s death; and
  • Any losses from fires, storms, shipwrecks, theft, and/or other casualties. Only uncompensated losses are permitted as a deduction.

Any estate administrative expenses may either be taken as a deduction against the estate or the income tax of the estate. This decision is made by the executor or administrator.

Do I Need an Estate Planning Attorney?

Yes, it is important to have the assistance of an experienced estate planning attorney for all aspects of estate planning. An attorney can help create an estate plan that accommodates your wishes and the needs of your loved ones. 

Also, an attorney will know which types of trusts, if any, are right for you. An attorney will also be able to draft a will according to your wishes. They can create a plan that best limits your tax liabilities and provides the most benefit to your loved ones.