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What type of assets are included in an estate’s valuation?

Although some assets may not have to go through probate, they may nevertheless count toward an estate’s valuation.

One example is life insurance proceeds. As a payable-on-death contractual arrangement, the life insurance proceeds are generally paid directly to the named beneficiary without the involvement of the probate court. However, they often count toward the estate’s value for estate tax purposes. In some cases, life insurance proceeds might tip an estate over the federal estate tax exemption, which was $5.43 million for 2015. That could result in an unexpected federal estate tax liability, possibly taxed at a 40 percent tax rate.

Fortunately, an attorney that focuses on estate planning knows there are strategies to minimize the taxable assets of an estate. In the case of life insurance, transferring the policy to an irrevocable life insurance trust might effectively remove the death benefits from the estate, for tax purposes. Even an individual’s home can be removed from the estate and placed into a qualified personal residence trust. Notably, the individual can still live in his or her home, even if it has been titled in the name of a trust.

Another strategy for reducing or eliminate estate tax might be a credit shelter trust, sometimes called an exemption trust. Up to $1 million might bypass the estate an go into a trust set up to benefit the decedent’s children or other beneficiaries after the death of the second spouse.

For individuals reluctant to give up control over their assets, a living trust can still serve as a tax-planning tool. Since control over the principle is retained, tax advantages may not start during the individual’s lifetime. Such trusts typically become irrevocable upon the grantor’s passing. Consequently, a living trust can be a way to use both spouses’ estate tax exemptions.

Source: Market Watch, “4 tax issues to consider when you close an estate,” Bill Bischoff, Feb. 17, 2015



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