How to minimize the cost of probate and taxes at death
A topic not often discussed at a dinner party is death, understandably. What’s less discussed is the cost of death and why it can be the most expensive financial event in someone’s, well, life.
Probate is the fees, including legal and administrative, involved with allocating and distributing assets of a dead person’s estate. Without proper preparation in advance, and depending on what state you die in, probate fees can be as high as 5% of the gross, total value of an estate.^1 California, although it doesn’t have a state estate tax, has one of the most expensive probate charges.^2 These expenses are usually paid by the estate, but if the estate’s assets are illiquid, or held up, then the beneficiaries will have to cough up the cash. Stories of what families go through in these situations might be the motivation you need to get your estate documents done and kept current with the latest laws.
Palm Springs estate planning attorney, Tracy Woo, puts it like this: “The biggest issue really is the time. Even small estates (under $150,000) can take 6 months [to settle]. Estates larger than $150,000 can easily and often do take a year or more. Also, with probate, if there is more than one beneficiary, you will most likely have to do an accounting (i.e., hire an accountant) to account for all the assets and expenses, and file it with the court for review and approval. The accountant will also likely have to file estate taxes even if there is none to pay according to an accountant I know.”
Federal estate taxes are currently high enough that most people don’t give it much thought; roughly $11 million per person ($22m per married couple) before the tax is applied. If assets are above these amounts, then the estate tax of up to 40% may apply. There’s a real reason to imagine that your assets could grow up to this amount by the time you die, or equally perilous is that the threshold for tax could lower. Given that the U.S. government is in dire need of revenue, applying taxes to the Baby Boomer generation when they die is very feasible.
There’s good news for those who aren’t dead yet: you can set up your estate plan to keep probate costs low. This includes creating a will, power of attorney, health care directive, and a trust. The latter document is designed to keep assets out of probate. It specifies how assets are to get distributed in the event of death or even from beyond the grave. If you need to avoid the estate tax, you can smartly transfer assets out of your estate and into an irrevocable trust before you die.
For those with 401(k)’s, IRAs, etc., keep in mind that income taxes will still be due when those accounts get distributed, charged to your beneficiaries at their marginal tax rates. If you have charitable intent, you can designate your IRAs to go to a charity tax-free and employ life insurance to provide tax-free to your beneficiaries.
Whatever your situation, it’s crucial to have your financial team in place to provide you with the most optimal advice. This includes an estate attorney, tax advisor, and finally, the financial planner, as I coordinate with your other professionals to design the most strategic solution for your goals. Call for a free initial consultation at (760) 537-0791 or book a meeting online at eurekawealthmanagement.com.
Tracy Woo is the owner of Tracy Woo Law Offices in Palm Springs, CA., and can be reached at (760) 851-0901, firstname.lastname@example.org.