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Don’t Overlook Estate Planning

Don’t Overlook Estate Planning

Talking about estate planning can be uncomfortable and you might think you don’t need to worry about it.  But almost everyone has some things on the Estate Planning Checklist to review periodically:

  1. Review and update beneficiaries listed on your life insurance policies, annuities, retirement accounts, 529 accounts or bank accounts.  Do you really want your ex to be listed as the beneficiary of your 401K plan?
  2. Check your accounts and review how you hold title to your assets.  How will the account pass to your family?
  3. Keep a current and updated list of all bank accounts, brokerage accounts, insurance accounts and the contact info for your representative for your loved ones to access just in case
  4. Life changes and you need to review the basics of your will including listed guardians and executors

Estate tax is different than income tax and is paid on the value of your total assets at the time of your death.  Even if your assets are below the federal filing threshold, you could be subject to estate tax on the state level.

The federal estate and gift tax exemption amount for 2020 is $11.58 million, or $23.6 million for married couples. At that level, you probably don’t need to worry about federal estate tax!  But even if you aren’t close to hitting the federal estate tax, your estate plan may need updating to reflect how you want your assets to pass to your heirs.

One other reason to consider an estate plan, is that the Oregon estate exemption remains $1 million and Washington’s exemption is $2.193 million.  These thresholds are considerably less than the federal exemption and planning ahead can save you and your family money.

Here are the basic things that we think you should review for your estate plan:

Update your beneficiary designations

Many people are not aware that your living trust document or your Will do NOT override the beneficiary designations for life insurance policies, retirement accounts, etc.  So, the most recent person you list as beneficiary on those forms will automatically get the money if you pass away, regardless of what your estate planning documents say. 

Beneficiary designations also avoid probate because the money goes directly to the beneficiaries you name.  Also consider naming a second beneficiary, also known as a contingent beneficiary. This will cover you if the first beneficiary dies before you do.

List of accounts that you should check in on:

  1.     Life insurance policies, annuities, IRAs and other tax favored retirement accounts – Check current beneficiary information and update beneficiary designation forms as needed
  2.     Bank and brokerage accounts – fill out transfer on death (TOD) or payable on death (POD) forms to establish/change beneficiaries
  3.     529 College savings accounts – Check current beneficiary information and update beneficiary designation forms as needed

Review your property ownership.

What does it mean to own a property as Joint Tenants with Right of Survivorship (JTWROS)?  If you own a property with your spouse as JTWROS, the surviving spouse will automatically take over sole ownership of the property when their spouse dies.  This avoids probate and the property transfer without exception to the surviving spouse.

One caution to using JTWROS ownership is if you hold a property with a non-spouse, the surviving tenant will get the property outright.  If this is your intention, then you don’t need to change anything, but if you want to keep your part of the property in your family, you may want to revisit this.

Establish or update you Will or Living Trust document

If you die intestate (without a Will), the laws of the state determine where your assets go.  Scary! So, it makes sense for you to make the decision on who gets what, and not leave those decisions up to your State legislature.

What is a Will?  The main purposes of a Will are to name the following:

  1. A guardian for minor children, who will take care of your children until they reach adulthood
  2. An executor for your estate, who pays your Estate’s bills, any taxes due and delivers the remainder to the beneficiaries
  3. And to specify which beneficiaries should get which assets.  (Reminder of what we mentioned above – retirement accounts, and the like follow the beneficiary designations listed on the accounts, and do not follow your Will.)

What is a Living Trust?  A trust that is established during your lifetime in which you transfer your legal ownership of assets to.  Assets you can transfer are primary residences, vacation properties, bank accounts, investment accounts, etc.  One pitfall that people run into is they set up a Living Trust then fail to transfer the legal ownership of the assets to the Trust. The main purpose of a Living Trust is to:

  1.     Avoid probate.
  2.     Name a Trustee who will oversee the Trust’s assets after you die, specifically funneling assets to the appropriate beneficiaries, when needed.
  3.     A Living Trust is revocable which means you can change the terms at any time or unwind it completely as long as you are alive and legally competent. 
  4.     Living Trusts become irrevocable on death.

For tax purposes, a Living Trust is disregarded which means there are no additional tax filings that need to be filed.  You report all income and expenses as normal on your Form 1040.

Please contact Sherwood Tax today with any questions.  We can walk through your questions and help coordinate information with an attorney of your choice if needed.