Estate planning helps to ensure that your estate (everything you own at the time of your death) goes where you want it to go as easily and smoothly as possible. There are many different aspects to estate planning, and best practices vary widely depending on your assets and your wishes for them.
However, all estate planners need to understand a few essentials. Before you start estate planning, here are five critical concepts you need to understand.
1. Estate tax
The estate tax is a tax applied to your estate. Your estate is everything that you own at the time of your death. After your death, someone files a final tax return on your behalf, and if the value of your estate is over the threshold, it must pay the estate tax.
As of 2022, the federal estate tax applies to the value of estates over $12.05 million. This number is doubled for a married couple. However, many states have estate taxes that apply at lower thresholds.
2. Inheritance tax
An inheritance tax is a tax paid by the person who inherited something. This is different than the above tax that is applied to the estate. The federal government does not have an inheritance tax, but many states including Iowa, Kentucky, Nebraska, New Jersey, and Pennsylvania have an inheritance tax.
Probate is a legal process that happens after someone's death. It verifies the will and ensures that your assets go to the heirs listed in the will. If you don't have a will, probate determines where your assets go based on the intestacy laws in your state.
A will is a document that allows you to specify where your assets should go after your death. A will does not have the power to distribute your assets based on any criteria.
For example, you can state that you want your granddaughter to receive $10,000 after your death. You cannot say that she only gets the money if she finishes college.
A trust is similar to a will in that it helps you distribute your assets after your death, but it also lets you add conditions. For instance, if you only want your granddaughter to receive an inheritance after she completes college, a trust makes that possible.
There are different types of trust, and they all play a valuable role in estate planning. The trust can own assets in a way that shields them from estate or inheritance taxes. It can allow you to create stipulations on how your assets are distributed. It can also help your assets to bypass the probate process.
When you hire someone to help you with estate planning, you will deal with all of these concepts. To learn more, contact an estate planner today.