There is a lot to consider when planning what you want to leave behind for those you love. It can complicate things, especially when dealing with different estate taxes and laws that surround a person’s estate.
The whole idea of inheritance comes from English common law and was passed on to the colonies. Over time, some of these laws have changed. Let’s look at a few common mistakes that people make when planning their estate and some of those deeper questions you can ask when it comes to inheritance and what you leave behind. We’ll also discuss estate tax and how they come into play. These are all important questions to consider as you approach this very important stage.
A History of Inheritance Law
Like many pillars of our legal system, inheritance law is derived from the traditions of English Common Law. After we gained our independence from Britain, many colonies passed their versions of some of these laws with their modifications. As westward expansion increased in the mid 19th century and new states began forming and joining the Union, some states became community-property states and adopted aspects of civil law. For example, most states would give widows the power over any fortune left from their husband’s estate.
Throughout the 20th century, widows were certainly treated with priority when it came to inheritance, and spouses were seen more favorably than children. Every state has its own set of laws and thus the role of inheritance can vary slightly from state to state. During colonial times, the colonies largely adopted English Common Law, but in later periods began making modifications in respect to inheritance, distribution of personal wealth, and had created provisions for creating wills and administrations while prohibiting primogeniture (when the first child takes all) and statues that allowed younger sons and daughters to receive shares of estates.
What is an Estate Tax?
The federal estate tax is a tax on property, cash, real estate, or other assets that are transferred from a deceased person to their chosen inheritors. In recent years, more and more people have gotten away with not paying an estate tax. According to the Tax Policy Center, the federal government has increased its exemptions that allow estates under a certain value to pass down property tax-free.
In 1997, legislators passed the Taxpayer Relief Act and it called for a gradual increase in the estate exemption from $600,000 to $1 million by 2006. In 2010, the Obama administration signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act and was set for only two years.
Changes were not made permanent until the Trump administration passed the Tax Cuts and Job Act in 2017 and the exemption increased significantly. The exemption works by stating that the gross value of your estate must exceed the exemption amount for the year of your death. The estate tax rate is 40%, but still lower than 45% in 2009. In the year 2020, the exemption is $11.58 million, which is up from the $11.4 in the year 2019.
Tips on Approaching Your Inheritance
Estate planning requires some soul searching for the things you find important in life. And yet, estate planning and thinking about inheritance is something that can be quite difficult for a lot of families. Here are some tips on how you can go about planning your inheritance:
- Begin with open communication and honesty. One of the important things about planning your estate is knowing what you’re dealing with and thinking about how you want your wealth to be divided and between whom. Be honest with yourself and with your family about it.
- Distribute equally and consider feelings. Parents often make the mistake of naming the older sibling as the one who takes care of all the affairs. This can often cause in-fighting as other siblings take it to mean that they are less trustworthy or capable. Many estate planning experts would suggest that you divide assets up evenly.
- Consider a trust. Speak with your financial expert about how trust can help you make things a little easier. A trust is a good way to make sure your children use the money wisely. You can choose to have the money distributed in chunks as your children get older and more mature. For example, some parents choose to distribute when the child turns 25, 30, and 35.
Get Perspective From Your Family
This is often neglected or people think that estate planning is done behind the scenes. It can certainly help to involve your family in your plans. Whether you have a one-on-one conversation or in a family setting, having casual conversations with your family can be a productive way to settle into a plan that fits your values and your vision for your estate’s future.
Contact Biel Fisette Iacono, Today
When it comes to wealth management and thinking ahead about your finances, work with someone you trust. Here at Biel Fisette Iacono, we work with individuals and businesses to sort out their finances and do Federal, State, and local tax filings, as well as estate and Trust tax filings. Connect with a knowledgeable person that can guide you through complex tax codes.