California Estate Planning for High Net Worth Estates
Posted by Janet Brewer on Mon, Jul 05, 2010 @ 11:26 AM
Failure to craft a solid and thoughtful estate plan can have disastrous tax consequences for families with significant assets.
If you live in Santa Clara County or surrounding areas, think carefully about your net worth
Chances are, you don’t think of yourself as having a high net worth estate. That’s one of the curiosities that seems to come with living in Silicon Valley. And yet, practically anyone who owns a house in Palo Alto, Los Altos, Portola Valley, Atherton, Woodside, or Menlo Park runs the risk of having estate taxes decimate their estate.
Why? Because beginning on January 1, 2011, an individual will only be able to pass along $1,000,000 ($2 million for couples) to his or her heirs free of estate taxes. If your estate is worth more than that, it will be subject to estate taxes of as much as 55%.
Figuring how much your estate is worth
So, for example, if you’re married and own a house worth $1.5 million, an IRA or 401k worth $500,000, and have a $1,000,000 life insurance policy, your estate is worth $3 million for estate tax purposes (a common misconception is that IRAs, 401ks, and life insurance don’t count for estate taxes. While these assets avoid probate and while life insurance is income tax free, they are part of your estate for estate tax purposes). Your estate tax rate on that extra $1 million is 49% - that is, $490,000!
A-B trusts can reduce tax liability
Simple planning (the use of an “A-B Trust” also called a “Bypass Trust” or a “Credit Shelter Trust”) can reduce that amount to $200,000. More advanced planning may be able to eliminate it entirely.
Oh, and by the way, if your taxable estate is worth $3 million, your tax will be approximately $945,000 without planning.
Bottom line: You run the risk of losing a very high percentage of your assets to the federal government upon your death unless you have planned carefully to minimize estate taxes. Your intended heirs may be left with bequests of a far lower value than you intended.
All the best,
