This is the second of a multi-part series from the chapter on Financial Accounting from BEFORE I GO, by Arie J. Korving.
To better allow you to understand some of the more technical issues involving estates, what follows is a brief description of some of the issues that you may be required to address at death. It is not a complete review of the topics covered and does not address the legal or tax consequences associated with the topics discussed, nor is it an endorsement or recommendation on my part of the particular strategies discussed. This information is believed to be current as of this printing, but proper legal advice is always recommended since changes are frequent.
The estate tax is a tax imposed on an estate at death. The amount of the tax depends on who inherits and the size of the estate at death.
Property transferred at death
Assets owned by a decedent can be passed on to beneficiaries in a number of ways. For example, life insurance passes to beneficiaries that are named in the policy. Other assets that are transferred by beneficiary designation include annuities, IRAs, employee retirement plans, and payable-on-death and transfer-on-death accounts.
Assets held as joint tenants with right of survivorship will pass to the surviving joint tenant or tenants immediately upon the death of a joint tenant. These assets are not subject to probate and are not subject to the terms of a will.
Other assets you own when you die will be controlled by your will or, if you do not have a will, by the law of the state in which you reside at the time of your death.
Property in trust is discussed later.
Allowable deductions and credits
Currently, you may pass an unlimited amount of assets to your legal spouse, if he or she is a U.S. citizen. If your assets are passed to your spouse, they become part of her or his estate. Because estates above a certain level can be subject to high estate taxes at death, it may benefit you to consult with an attorney to determine if there are ways of minimizing the estate tax on the death of the second-to-die.
Keep in mind that the way property is titled often determines who receives the assets at death without regard for wills or trusts.
Jointly held property
If spouses hold property jointly, one-half of the value of the property will be included in the estate of the spouse who is the first to die. All of the property will automatically pass to the surviving spouse estate-tax free due to the marital deduction. Generally, the surviving spouse will receive a step-up in tax cost basis to fair market value for only one-half of the property.
In some cases, property is owned jointly with someone who is not a spouse. Consult an attorney to determine how this affects any taxes owed.
Property may also be titled as “tenants in common.” Property owned in this manner will pass under the terms of the decedent’s will and not by operation of law.
Some states also have some form of a community property system to determine the interest of husband and wife in property acquired during marriage. Generally, under a community property system, all property acquired during marriage is deemed owned one-half by each spouse, regardless of the titling of the property. Consult your attorney to see if this applies to you and what this means at death.
For a copy of BEFORE I GO and the accompanying workbook, contact Korving & Company.