Intervivos

Many people create estate plans to limit and/or avoid estate taxes, court fees, and attorney fees. This is especially important when the value of the estate rises above the federal estate and gift tax exemption. The current exemption is $5.6 million per individual. Anything above that amount is taxed at 40% by the federal government. That means you pay $400 thousand to the federal government for every $1 million you have above the exemption! I try to be a glass half full type of guy, so I guess if you consider “Uncle Sam” part of the family, you are still passing your wealth to your loved ones.

Aretha Franklin died in August without a will or trust. Even though a will does not avoid probate or estate taxes, it is better than nothing because a person can indicate how they would like their assets to be divided. Without a will, the estate passes under the laws of intestacy. This usually works out for the children; however, Franklin left behind a son named Clarence who has special needs. Clarence will need financial assistance for the rest of his life and Franklin might have wanted to give Clarence a bigger portion of the estate to cover his medical and living expenses.

I know there may be a few of you reading this that do not enjoy math, but don’t let that keep you from finishing the article. Franklin had an estimated net worth of $80 million. Remember that the current federal estate and gift tax exemption is $5.6 million per individual, leaving a mere $74.4 million subject to the federal death tax. That means Franklin’s estate will pay $29.76 million to the federal government.  Franklin’s estate will also be subject to Michigan’s state death tax, court fees, and attorney fees.

Prince died in 2016 with an estimated $200 million net worth. The exemption in 2016 was $5.45 million per individual. Following the same steps as we did for Franklin, we find that Prince’s estate paid $77.82 million to the federal government. It was estimated that half of Prince’s estate was used to cover federal and state taxes, court fees, and attorney fees.

There are various estate planning options that can be used to limit your estate’s exposure to federal and state tax liability. I have fun speaking with my clients about the federal death tax exemption limit and hearing their jokes about how they are just barely below the limit or wish they were at the limit. Even if you are not at the point of needing an exemption trust or using another strategy to minimize taxes on a high net worth estate, you can still avoid court fees and limit attorney fees through proper planning.