Finance 260 Estate Planning

Finance 260 Estate Planning: Estate Transfer Process

Transferring Assets to the Next Generation

  • The process of transferring assets may involve a legal court process known as Probate.

Definition of Probate

  • Probate is defined as:

    • American Bar Association: "Probate is the formal legal process that gives recognition to a will and appoints the executor or personal representative who will administer the estate and distribute assets to the intended beneficiaries."

    • Webster Dictionary: "To establish (a will) by probate as genuine and valid"

    • Wikipedia: "Is the judicial process whereby a will is ‘proved’ in a court of law"

General Characteristics

  • Generally involves a will, but is also necessary when an individual dies intestate (without a will), which leads to intestate succession.

    • Testate: Having a will at the time of death.

    • Intestate: Not having a will at the time of death.

Fees Involved with Probate

  • Attorney Fees: Payment for legal assistance, which can increase estate costs.

  • Court Fees: Charges related to filings and other court services.

  • Accounting Fees: Costs for accounting services related to estate management.

  • Other Fees: May include various administrative fees.

Timeframe for Probate

  • Varies by state regarding costs and court processes.

  • Duration can range from a few months to several years.

  • Complexity of the estate significantly influences the duration.

  • If a will is contested, it can greatly increase both time and costs related to the probate process.

Wills

  • A will outlines:

    • Beneficiaries of Assets

    • Distribution Details: How and when beneficiaries will receive their assets.

    • Guardians for Minors: Appointment of guardians for any minor children.

    • Executor: The individual responsible for carrying out the provisions of the will.

Importance of the Executor

  • The executor is tasked with administering the estate according to the will.

Intestacy Laws

  • Should an individual lack a will, Intestacy Laws activate to dictate asset distribution.

  • Intestacy Laws are existing laws that govern how assets are allocated among heirs.

  • These laws vary widely by state and can lead to unexpected distributions.

Beneficiary Designations

  • Some assets have direct beneficiary designations that take precedence over a will, such as:

    • Retirement Accounts: Includes 401(k), IRA, etc.

    • Insurance Policy Proceeds

    • Trusts

    • Accounts with TOD (Transfer on Death) Designations

    • Jointly Held Assets

  • It is crucial that these designations are kept accurate and updated.

Benefits of Beneficiary Designations

  • Assets with beneficiary designations typically bypass probate, leading to:

    • Decreased probate fees.

    • Quicker distribution to beneficiaries.

Trusts

  • A Trust is defined as:

    • Fidelity: "A fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries."

Types of Trusts

  • There are many types of trusts, each serving different purposes.

  • Pros of Trusts:

    • Greater control over asset distribution.

    • Offers more privacy (avoids the public nature of probate).

    • Some trusts can aid in avoiding estate taxes.

  • Cons of Trusts:

    • Can be expensive to set up (attorney fees may apply).

Key Types of Trusts to Know

  1. Revocable Trusts

    • Assets placed in a revocable trust typically avoid probate.

    • Beneficiaries and asset distributions can be changed at any time.

    • However, estate taxes still apply to assets within the trust.

  2. Irrevocable Trusts

    • Assets transferred to an irrevocable trust can avoid probate and potentially estate taxes.

    • Once established, changes to beneficiaries or asset allocations are not typically allowed.

Estate Taxes

  • There is a significant federal estate tax applied to assets upon an individual's death.

  • Some states impose additional state estate or inheritance taxes.

Estate Planning and Tax Minimization

  • A well-structured estate plan can help minimize or avoid tax liabilities.

Inheritance Taxes

  • Nebraska Inheritance Taxes:

    • Six states currently impose an inheritance tax: Iowa, Kentucky, Maryland, New Jersey, Pennsylvania, and Nebraska.

    • Nebraska Tax Structure:

    • Close Family Members (e.g., siblings, children) owe 1% on inheritances over $100,000.

    • Distant Relatives (e.g., nieces, nephews) owe 11% on inheritances over $40,000.

    • Others pay 15% on inheritances over $25,000.

Federal Estate Tax Exemption

  • The federal estate tax applies only to amounts exceeding a defined exemption threshold.

  • As of 2025, the federal estate tax exemption is set at $13,990,000.

  • Portability of Exemptions:

    • Exemptions for married couples are portable, allowing the surviving spouse to use the deceased spouse's unused exemption, effectively doubling the exemption amount.

Estate Tax Portability Example

  • If the first spouse dies, the second spouse can potentially claim a total estate tax exemption of:
    13,990,000 imes 2 = 27,980,000

Transferring Assets Between Spouses

  • Assets can typically be transferred between spouses without incurring estate taxes.

Hypothetical Scenarios

  • Example 1: A married couple with $20 million in farmland. If both die tomorrow, their estate would not necessarily incur federal estate tax due to portability.

  • Example 2: A single man with $15 million in farmland would have his estate subjected to federal estate tax upon death.

  • Example 3: If parents die and leave a combined estate worth $500,000 to their child in Nebraska, the child would owe $0 in Nebraska State Inheritance Tax due to the applicable exemption thresholds.