(Part 1)
MAJORITY is concerned with saving money on their taxes, but ignore planning to avoid estate taxes, which can consume at least 40% of a family’s taxable estate before it can be passed on to the children. With proper estate tax planning, you could avoid probate and save wealth in estate taxes.
Estate planning is simply how you want your assets distributed to your heirs after you die with as little time and expense as possible.
There are two major estate-planning challenges that must be addressed:
1. How to avoid probate.
2. How to reduce estate taxes.
How to avoid probate court: The purpose of probate is to transfer your assets to your beneficiaries, decide if the Will is valid, take care of the financial responsibilities, and only affects those assets that are titled under your name for which there is no designated beneficiary, after you have passed away. Instructions in the Will are typically carried out through probate court. While there may be times when probate is necessary, there are problems with the probate court public process.
How to avoid or reduce federal estate taxes: A person’s estate includes everything that they own at the time of death, including life insurance death benefits. One way to save estate taxes is by using the revocable living trust.
Problems with Probate
1. Time: It takes an average of nine to 24 months to probate an estate. If there are a lot of assets, or any complications, the time could be longer, sometimes even years.
2. Costs: It is estimated that average cost of probate could be as high as 10% of the value of the estate. If the estate can be probated for half that amount, it is still a cost that can be completely avoided.
3. Control: The estate is controlled by the probate court. A Will is your instructions to the court, but because of possible contesting of the will or defects, the court may not follow your request. Your heirs must get court approval before they will have access to your estate.
4. Publicity: All probate court records are open to the public for their inspection or copying. That includes all accounting and financial information, i.e., how much your estate is worth, how much you owe, and who you are leaving your estate to and how much you leave them. You may not want all of this information to be part of the public records.
For these reasons, we usually recommend that probate be avoided by use of a revocable living trust particularly if you own real estate. Assets held in a revocable living trust are distributed according to the trust instructions regardless of the instructions in your Will without court supervision. It is also recommended to execute a durable financial power of attorney if you are the trustee of your own living trust.
In accordance with IRS Circular 230, this communication is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.
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Sy Al-os Accountancy Corporation provides accounting and tax services to individuals, corporations, LLCs and business entities. The Firm has a niche in defending taxpayers audited by the IRS and other governmental agencies.
