In the simplest terms, there are three ways:
To determine the current net value, add your assets, then subtract your debts. Include your home, business interests, bank accounts, investments, personal property, IRAs, retirement plans and death benefits from your life insurance.
Your estate will have to pay federal estate taxes if its net value when you die is more than the exempt amount set by Congress at that time. In 2019, the federal exemption is $11.4 million and the highest estate tax rate is 40%. Some states have their own death or inheritance tax, so your estate could be exempt from federal tax and still have to pay state tax.
Estate taxes are different from and in addition to probate expenses, which can be avoided with a revocable living trust, and final income taxes, which must be paid on income you receive in the year you die.
Federal estate taxes are expensive (historically, 45%-55%) and they must be paid in cash, usually within nine months after you die. Because few estates have the cash, it has often been necessary to liquidate assets to pay these taxes. But, if you plan ahead, you can reduce and even eliminate estate taxes.
Assets You Probably Want in Your Living Trust
• Real property (home, land, other real estate)*
• Bank/credit union accounts, safe deposit boxes
• Investments (CDs, stocks, mutual funds, etc.)
• Notes payable (money owed to you)
• Life insurance (or use irrevocable trust)
• Business interests, intellectual property
• Oil and gas interests, foreign assets
• Personal untitled property
Assets You May Not Want in Your Living Trust
• IRA and other tax-deferred retirement accounts
• Incentive stock options and Section 1244 stock
• Interests in professional corporations
Find out if you can take the title initially as trustee of your trust. If not, transfer the title right away. If you’re not sure how to transfer it, contact your attorney for instructions.
Personal property (artwork, clothing, jewelry, cameras, sporting equipment, books and other household goods) typically does not have a formal title. Your attorney will prepare an assignment to transfer these items to your trust.
If you live in an noncommunity property state and have owned an asset jointly with your spouse since before 1976, transferring the asset to your living trust could cause your surviving spouse to pay more in capital gains tax if he or she decides to sell the asset after you die.
If the asset is your personal residence, this would not be a problem unless the gain is more than $500,000. But it could be a problem for other assets like farmland, commercial real estate or stocks. If you think this might apply to your situation, be sure to check with your tax advisor or attorney before you change the title to your trust.
Other assets that should probably not be transferred to your trust are incentive stock options, Section 1244 stock and professional corporations. If you unsure whether or not to transfer an asset to your trust, check with your attorney.
Do not change the ownership of these to your living trust. You can name your trust as the beneficiary, but be sure to consider all your options which could include your spouse; children, grandchildren or other individuals; a trust; a charity; or a combination of these. Whom you name as beneficiary will determine the amount of tax-deferred growth that can continue on this money after you die.
Most married couples name their spouse as beneficiary because 1) the money will be available to provide for the surviving spouse and 2) the spousal rollover option can provide for many more years of tax-deferred growth. After you die, your spouse can “roll over” your tax-deferred account into his/her own IRA and name a new beneficiary.
In 2020, The Secure Act eliminated the “stretch IRA” provision which previously had permitted non-spouse beneficiaries of qualified retirement accounts (e.g., IRAs and 401(k) plans) to establish and inherited IRA and keep the account tax-deferred based on the beneficiary’s life expectancy. Under the new rules, a non-spouse beneficiary must withdraw all of the money from an inherited account within 10 years. The new law does not apply to inherited IRAs established prior to 2020 nor does it apply to spouses or to disabled beneficiaries (provided the disabled beneficiary is not more than 10 years younger than the original account holder). Minor children are also exempt until they reach the age of majority, at which time the child will have 10 years to completely withdraw the assets in an inherited IRA. The new rules will result in most non-spouse beneficiaries paying more in taxes than they would have under the old rule.
Another thing to consider when choosing a beneficiary for your retirement accounts is that any time you name an individual as beneficiary, you lose control. After you die, the beneficiary can do whatever he or she wants with this money, including cashing out the account and destroying your carefully made plans for long-term growth. The money could also be available to creditors, spouses and ex-spouses, and there is the risk of court interference at incapacity.
Naming a trust as beneficiary will give you maximum control because the distributions will be paid not to an individual, but into a trust that contains your written instructions stating who will receive this money and when.
It is still easy to make a costly mistake when naming a beneficiary of qualified retirement accounts and since there is often a lot of money at risk, be sure to get expert advice.
Unless the car is valuable and substantially increases your estate, you will probably not want it in your trust. The reason is if you are at fault in an auto accident and the injured party sees that your car is owned by a trust, he or she may think “deep pockets” and be more likely to sue you.
All states allow a small amount of assets to transfer outside of probate; the value of your car may be within this limit. Some states let you name a beneficiary; in some, cars do not even go through probate. Your attorney will know the laws and procedures in your state and will be able to advise you.