It Is not Just the Wealthy that Are Affected by Estate Taxes by Michael A. Flower, CFP

How many times have you seen an article about a wealthy person who failed to do the proper planning for their estate? It is surprising when people with such wealth and access to professional financial advisors fail to take action to reduce estate taxes and preserve their wealth. The fact, however, is that most people are not ultra-wealthy and will not be affected by the Federal Estate Tax with the current exemption of $5,250,000 in 2013. In other words, most of us do not have wealth that exceeds $5.25 million.

Here are three items that would affect a larger part of the population in regard to Estate Taxes:

What State Do You Live In? Some states have an Estate Tax and other states may have an Inheritance Tax. Some states have both. While Federal Estate Taxes may not affect you, your state’s Estate/Inheritance Tax may diminish the value of what you pass on to your heirs. For example, the state of New Jersey has an Estate Tax Exemption of $675,000. The exemption amount is much easier to reach compared with the Federal amount of $5,250,000. Also, the top Estate Tax rate in New Jersey is 16% of any assets over the $675,000. New Jersey also has an Inheritance Tax.
Do you have life insurance? If so, you have planned well to protect your family, if you passed away too soon. Term life insurance can provide millions of dollars of coverage at a very affordable price. The problem is that life insurance proceeds are included in your taxable estate. When we ask a client, ”What assets do you have in your estate?“ They typically respond, “I have a home, two cars, an investment account, and an IRA.” If all of those assets add up to $500,000, then you would not have an Estate Tax problem. However, your $2mm 20 year term life insurance plan can create an immediate Estate Tax problem.
Do you have a Fancy Will? Most individuals and couples either have a Simple Will or no Will at all. We would normally recommend a client to consider obtaining a “Fancy Will”. The two issues mentioned above about the State you reside in and whether you have life insurance can be aided with basic Estate planning techniques or a “Fancy Will”.
If your state has an Estate Tax exemption amount, Simple Wills only allow one spouse to take advantage of the exemption. If you complete some basic estate planning, it might allow both spouses to take advantage of the exemption. For example with a “Fancy Will” in the state of New Jersey, instead of a $675,000 exemption, your estate can be valued at $1.35 mm before your estate needs to worry about Estate Taxes.
In regard to life insurance, it may make sense to have an irrevocable trust own the life insurance. If you own the life insurance, it is part of your estate. If a trust owns the life insurance, it would not be included in your estate.
You worked hard during your life to save, accumulate and provide for your loved ones. Why would you want assets to go to the government or state, when it is unnecessary? Basic planning with a qualified estate planning attorney can help reduce or eliminate the loss and retain it for your loved ones.
Michael can be reached at 973-582-1004 or MFlower@FinancialPrinciples.com.
Securities offered through Securities America, Inc., member FINRA/SIPC, Michael A. Flower, CFP® Registered Representative and Advisory services offered through Securities America Advisors, Inc., Michael A. Flower, CFP®. Investment Advisor Representative. Financial Principles, LLC and the Securities America companies are not affiliated.

The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.