Knowing your estate tax can lower burden

It’s not a topic that comes up often, but knowing what a person’s estate will consist of is important. Why? Estate taxes.

Recent changes in federal law allow a permanent $5 million base amount of tax-free assets in an estate. The annual amount will be indexed for inflation in future years. For lifetime gifts and estates of individuals dying during 2014, the tax-free amount is $5,340,000.

Often, as estate executors have found, there are surprises as the list of assets and properties grows and tax issues can mount up. Proper planning today can lower estate taxes later.

For example, many people assume that because life insurance proceeds pass directly to the beneficiaries, estate taxes will not be applicable to those funds. Wrong. When the insured individual is also the policy’s owner, then the proceeds will be counted for estate tax purposes.

The same mistake is often made about jointly owned property. Yes, its value (or of it when the only other co-owner is a spouse) is potentially taxable in your estate.

So what exactly will be subject to estate taxes? Basically, everything you own when you die. Adding it all up on a lazy afternoon is actually an important part of the estate planning process.

That “everything you own” list needs to include a reasonable value for your real estate, stocks, bonds, bank accounts, retirement funds, business interests, life insurance, personal property, collections of things, deferred compensation, property in revocable trusts, and property in irrevocable trusts where you retain some type of control.

Don’t undervalue it now or your executor will have a larger estate to deal with later than you’re planning for. Your list may even prove to be a useful starting point for your executor if you update it regularly.

Also, don’t forget what you owe. Your executor will have to pay your debts, which lowers your taxable estate’s value.

The all-important number of $5,340,000 in 2014 (and higher amounts in future years) now comes into play. You can give away that much to anyone during your lifetime or through your estate tax-free, but above that level gift or estate taxes will be owed (up to 40%), unless you give it to your spouse or to a charitable or educational organization.

Giving property to your spouse only postpones the estate tax because it could be owed later, depending on the tax laws at the time. Of course, if your spouse needs the property or its income, that’s what is most important, not the taxes.

If, however, lowering estate taxes is a consideration, charitable gifts in your will can be a beneficial way to accomplish that and help others at the same time.

That’s good planning.


Deborah Miller is director of planned giving for the West Virginia University Foundation Inc.