Many individuals may be surprised when they find out that they are millionaires when considering the value of their homes and/or life insurance policies. In this instance, many should consider more in-depth estate planning.
Considering Net Worth
Many people don’t often consider their “net worth”, but when determining that value there are some things that are often overlooked – checking and savings accounts, investments, retirement accounts are all easily valued, but what about real estate? You might have had an idea of the value of your home or vacation home, but recent market conditions have significantly increased the value of most real estate. Another item that is often overlooked is life insurance – while the death benefits of life insurance pass income tax free to the beneficiaries, the value is included in your estate for estate tax purposes (see our article on this topic here). As a result, many people are surprised to find that they’re actually millionaires.
This distinction is especially important for Massachusetts residents – while there is discussion about raising the threshold, currently Massachusetts estate taxes kick in if your estate (or if the combined estate of a married couple) is larger than $1 million. In these instances, failing to speak with an estate planning attorney or just relying on a Last Will and Testament for your estate planning, could cost you tens of thousands of dollars in unexpected taxes. By planning ahead, estate taxes can be minimized or even avoided entirely.
Techniques
One common technique for a married couple is the creation of revocable living trusts that would help to hold and organize funds on the death of the first spouse in a way that the deceased spouse’s estate tax exemption is fully used. When done correctly, this step saves a minimum of $40,000 in estate taxes, and the impact can be even higher depending on the couple’s finances.
Another technique includes making regular, lifetime gifts to your heirs (or to a trust for the benefit of your heirs) that are less than the annual gift tax exclusion (currently $17,000 per person per recipient). The gifts are made without any tax implications and can serve to reduce the size of your estate which reduces your potential estate tax obligation. Under current rules, a married couple with three children and eight grandchildren could gift away $374,000 per year ($17,000 from each spouse to each child and grandchild: $17,000 x 11 recipients x 2 givers) without any taxes owed at the time of the gift, and either reducing or eliminating their estate taxes depending on their other assets.
The next time you consider the value of your home and/or life insurance policies, you may be surprised to see that you are a millionaire. Now that you know there is more to your net worth, are you wondering if you could be a millionaire, and what that means for your potential estate tax obligations? If you would like to discuss your estate planning options, please visit our website to learn more and contact us today.