Probate. This is the legal review process, overseen by the local probate court, which occurs after your death. It’s designed to ensure your assets are disbursed according to your will or, if there’s no will, according to state law. Not all assets pass through probate, including assets held jointly with right of survivorship and retirement accounts with beneficiary designations.
Right of survivorship. If you own a house, car or other property jointly with right of survivorship, it passes directly to the survivor upon your death and doesn’t go through probate.
Beneficiary designations. Assets in retirement accounts and trusts, and proceeds from life insurance policies, typically pass to the beneficiaries named on these assets, rather than to the heirs named in your will.
Trusts. A trust can be created while you’re still alive or upon your death. Trusts are formed for a host of reasons, including protecting assets from creditors, saving on estate taxes, avoiding probate and controlling how assets are used after you die.
Gift-tax exclusion. This is the annual sum that you can give to another person, without worrying about the gift tax. In 2023, the gift-tax exclusion is $17,000. Got three grandchildren you want to help? You could give each grandchild $17,000, thus shrinking your taxable estate by $51,000. If married, your spouse could give another $51,000.
Federal vs. state estate tax. Federal estate taxes are levied on estates worth more than $12.92 million in 2023 and $12.06 million in 2022. Roughly a third of states have their own estate or inheritance tax. These typically kick in at lower asset levels than the federal estate tax.
Inheritance tax. While estate taxes are levied on the total sum bequeathed, inheritance taxes are levied on the recipients of the money. Six states currently levy inheritance taxes. Certain heirs may be exempt from the tax, such as your spouse and children.
Estate tax exclusion. This is the total sum, set at $12.92 million in 2023 and $12.06 million in 2022, that you can bequeath free of federal estate taxes. If, in any year, you give more than the gift-tax exclusion to someone, the amount in excess of the gift-tax exclusion will reduce the total sum you can bequeath tax-free upon your death. For instance, the gift-tax exclusion is $17,000 in 2023, so a gift of $1,017,000 to any one individual would reduce the credit available at your death by $1 million, to $11.92 million.
Unlimited marital deduction. Neither the gift-tax exclusion nor the estate tax exclusion matter when passing assets to your husband or wife. Both during your lifetime, and upon your death, you can give an unlimited sum to your spouse.
Step-up in basis. Under current law, if you own, say, a home or stocks in a taxable account that are worth more than the price you paid, the cost basis of these assets is stepped up to their current market value as of the time of your death, thus eliminating the potential capital-gains tax bill.
Power of attorney. In case you become incapacitated, you might draw up powers of attorney to designate others to make financial and medical decisions on your behalf.
Living will. This document specifies your wishes concerning life-prolonging medical procedures.
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