Most people do not realize that, for estate tax purposes, all of your assets, including retirement accounts and life insurance, are part of your taxable estate. Financial advisors often tout the fact that life insurance is not taxable, which is only partially true. It is not income taxable but unless the insurance is placed into an irrevocable trust or the owner is a person other than the insured and the insured’s spouse, the death proceeds are part of your taxable estate.
In summary, all of the assets one owns, regardless of what they are and/or where they are located, are part of your taxable estate–i.e, real estate, stocks, bonds, jewelry, etc. If one’s estate exceeds the federal and/or state estate tax limits, it is important to engage in estate planning to avoid the estate tax for one’s family. There are some simple steps one can take–for example, annual gifting, paying for someone’s educational and or medical expenses. Moreover, if one owns life insurance, the insurance can be placed in a trust and then the value of it falls outside of one’s taxable estate.
When one spouse is not a citizen, there are unique problems that need to be tackled, which generally involves providing for that spouse in a trust. Even if both spouses are U.S. citizens, there needs to be some planning done to avoid an estate tax when the surviving spouse passes. One simple solution is to create credit shelter or bypass trusts under the couple’s wills. Perhaps more important, is to make sure that one’s assets are correctly titled so that one’s wishes are carried out but also in order to minimize or avoid the estate tax. Financial institutions often encourage their clients to put beneficiaries on all of their accounts, including non-retirement accounts. That should not be done blindly, as doing so can completely upend one’s estate planning.
So what should one do? The first step is comprising a detailed list of one’s assets, noting any joint owners or beneficiaries, and stating the nature of the assets (for example, real estate, retirement asset, etc.). After that, one should sit down with an estate planning attorney who is also experienced when it comes to taxes.