The state of your estate: Three things you should know about estate planning

by Badgley Phelps | Aug 15, 2016

Wills, trusts, beneficiaries, oh my! Estate planning can be overwhelming if you’re not focused first on your unique goals. A good place to start in defining those goals is to calculate your net worth and determine ownership of assets. You’ll need to decide upon your beneficiary designation, review your will and trust, determine the amount of potential estate tax you’ll be required to pay and check in with your estate tax attorney. With all those boxes ticked, however, there are still three things about estate planning that may surprise you.

Even if you’re a millionaire, estate tax doesn’t automatically apply to you.

Lawmakers raised the level at which estate taxes kick in back in 2011, and the level continues to adjust with inflation. For the 2016 tax year, the IRS-allowed exemption is $5.45 million, meaning as long as you leave behind less than that amount, you aren’t subject to federal estate tax. That said, if your estate exceeds that exclusion amount, you can give tax-free lifetime gifts of up to $14,000 per year, which does not count against the $5.45 million amount, allowing you to give tax-free money while you’re living, thus reducing the total amount of your taxable estate. What’s more, both spouses can give gifts, so that’s $28,000 per year tax-free, up to $10.9 million.

Life insurance proceeds are often included as part of your taxable estate.

Even though your life insurance policy may pass to your heirs tax free, the proceeds can be included in your taxable estate—even if the benefits go directly to beneficiaries rather than passing through the estate’s probate proceedings. If your spouse is the beneficiary, this isn’t a concern, but your children or other beneficiaries could be impacted. Life insurance trusts are a workaround, but they come with their own complications, so it’s good to discuss the pros and cons with a trusted adviser.

Your state might charge estate taxes. (If you live in Washington, it does.)

Many people don’t realize that estate tax doesn’t stop with the federal government. Many states also assess estate taxes, and some of them have much lower exclusion limits. For the 2016 tax year, the Washington state tax exemption is $2.08 million, with estates in excess of this amount subject to a 10 - 20 percent tax. However, this doesn’t apply to real estate in another state—if the property is held in a living trust. It’s essential to factor in these considerations and plan for a potential state-level estate tax even if you fall well below the federal exclusion limit.

The sooner you plan and clearer you are with your intentions, the less likely there will be issues or disagreements amongst family members down the road. Whether you’re just getting started or want to revisit your existing estate plan, we can help. Contact us today.


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