Estate Planning For The Rest of Us

In 2016 only estates of individuals worth more than $5,450,000 are taxed ($10,900,000 for a married couple).  People with estates approaching or exceeding those amounts use various creative methods to avoid paying the tax including a GRAT (grantor retained annuity trust), a CRUT (charitable remainder unitrust), and an FLP (family limited partnership), to name a few.  It is estimated that only 2 out of 1,000 estates actually owe tax.  Does that mean that the other 99.8% of us can ignore estate planning entirely?  Sadly, no.  You can still make crucial mistakes that can cause taxes and severe problems for your heirs.  First, let’s look at how the estate tax and transfers at death work. 

Some Estate Basics
The Big Picture – The estate tax and how it is applied has changed drastically over the last 40 years.  The table below shows how much you can pass tax free (the exemption amount), the maximum tax rate and the allowance of portability (keep reading) since 1976.


When an unmarried individual dies, all of his assets go into his “gross estate”.  This includes insurance proceeds on the deceased person’s life (unless held in a special trust), retirement accounts, real estate, investment accounts, business interests, jewelry, cash, etc.  If the gross estate is less than the exemption amount, no estate tax is due.  If the gross estate is more than the exemption, tax is due on the excess within nine months of death. 

For married couples, the estate tax can be trickier to calculate.  Using the “unlimited marital deduction”, the first spouse to die can leave all of his or her assets to the surviving spouse with no tax.  However, prior to 2011 when “portability” came into the law, the first spouse to die could lose their exemption amount if the marital deduction was used.  Frequently, estate tax would be due at the death of the surviving spouse.  To avoid this result, most wills created a bypass trust at the first spouse’s death in order to use the exemption amount for that spouse.  The surviving spouse received income from the trust, but did not own or control the trust assets.

Using a bypass trust required complicated wills, trust documents and trust tax returns.  Those items created a lot of cost that, for most people, was a waste.  Congress came to the rescue (hard to believe, I know) and changed the estate tax laws to allow portability of the exemption.  Starting in 2011, any unused exemption of the first spouse to die can be used by the surviving spouse’s estate.   No trusts to worry about, no extra tax returns to file and no added costs.  For most married couples, the first spouse to die can leave all assets outright to the surviving spouse and no estate tax is due at either death.

Who gets What? – A will is normally used to instruct your executor after your death how your assets should be distributed.  Many assets, though, are not subject to the provisions of your will.  Retirement accounts (IRAs, 401Ks, pension plans) use a beneficiary designation to determine who inherits your accounts.  Life insurance also has a beneficiary designation.  Payable on death bank accounts instruct the bank who to pay on your death.  Property you own with your spouse as joint tenants passes immediately to your spouse at your death.  So, if you and your husband’s only assets consist of a house owned together, joint bank accounts, some IRAs and life insurance, a will is irrelevant regarding who ends up with your assets.  (There may be other important issues that a will might address including guardians for your children, who gets your stamp collection, and burial instructions.)  Many people, however, also have bank accounts, businesses, brokerage accounts, etc. in their individual names.  Upon death, a will is important for determining ownership of those assets. 

Avoid These Costly Mistakes
As mentioned above, even after the increased exemption amount and portability rules, there are still mistakes that you should avoid. 

I Don’t Have a Will – you might be one of those people described above who does not have any assets that will pass under the will and you think a will would be a waste of time.  Aside from non-financial issues, are you sure you do not have a business interest or bank account or brokerage account or jewelry that is in your name alone?  What happens if you and your spouse die together and neither has a will?  In Tennessee, if you die without a will, your assets go to your closet relatives under the “intestate succession” laws.  You might be surprised how those laws work.  Below is from the website.

If you do not have a will, Get One!  Call an attorney or go online, but get a will!

Forgot to Fill in the Blank - When you open an IRA account, you are asked to designate a beneficiary.  This person inherits your account upon your death.  What happens if:

  1. You forget to provide that information?
  2. You no longer want the original beneficiary to inherit your IRA?
  3. You divorced the beneficiary or they passed away?

The answer for each question is different, but the common denominator is that your current wishes will not be carried out.  Here are three items to resolve:

  1. To make sure that your beneficiary designation is correct, simply ask your IRA custodian or broker to send you a copy of the designation on file.
  2. Make sure you also designate a contingent beneficiary.  This person would inherit your IRA if your primary beneficiary passes before you do (tragic accident where both you and your spouse are killed). 
  3. In almost all cases your beneficiary should be a person as opposed to a trust.  If a trust is listed as your beneficiary, see an attorney and seriously consider changing your beneficiary to a person.   

My Will is a Relic – If your will was drafted before 2011, it probably does not have language that follows the new portability rules.  As a result, you could put all of your assets in a trust for your spouse unintentionally.  Remember that prior to 2011 most wills created a bypass trust at the death of the first spouse to hold assets so that the exemption amount could be utilized.  The trust provision mandated that estate assets up to the maximum amount of estate exemption amount be placed in trust.  Today that maximum amount is $5,450,000.  If your will still contains that provision and your estate is less than $5,450,000, all of your assets could go into a trust.  Many times the trust provision of a will limits what a spouse can do with trust assets plus a tax return would have to be filed for the trust each year.  Your spouse would probably not be happy with this result.   

If your will was drafted more than five years ago, have it updated!      

The costly mistakes above are easily resolved, but also really easily put off to that mythical time called “Someday”.  Here is a sure way to make sure you deal with any of these mistakes you may have – every day until you resolve these issues, go to YouTube and force yourself to watch both complete acceptance speeches from the major candidates for President.  (No fast forwarding allowed.) 

Estates and wills can be very confusing.  Feel free to call or email me to discuss your situation.  I am not an expert, but I can help point you in the right direction.