With tax season under way, money matters are on people's minds, especially those who are considering an estate plan to protect their assets from taxation.
"Your estate includes everything you own, and it's subject to state and federal taxes when you pass on," said Henry Sforza, a CPA at Sforza and Walker Inc.
Without an estate plan, he cautions, the burden of paying those taxes leaves fewer assets to pass to on to heirs.
"When a person dies, the government takes a snapshot of everything that they own on the day they die," said Jack Alpern, attorney at the Alpern Law Firm in Warren. "That snapshot includes real estate, stocks, bonds, mutual funds, cash, life insurance which they own on their own life, obligations that are owed to them, mortgages, annuities, retirement plans and household goods."
An estate plan commonly includes a will, instructions for end-of-life decisions, and measures to protect assets and heirs from estate taxes.
"There are two estate taxes that we need to be concerned with," said Alpern. "The first is the Ohio estate tax, imposed on people who live in the state of Ohio or reside out of state but own real estate in Ohio."
"Currently, Ohio taxes estates whose assets exceed $338,333, so any estate that has a net value in excess of that amount has to currently pay Ohio tax," said Sforza.
According to Alpern, that tax begins at 2 percent and goes up to 7 percent as the value of the estate increases.
This tax will no longer exist after Dec. 31 of this year.
"The federal estate tax is far more serious (than the Ohio tax). The federal estate tax has an amount that you can give away in your lifetime or upon death of up to $5 million per person tax-free," Alpern said. "On Dec. 31 of this year, that goes away and only the first $1 million will be available tax-free to your heirs. Everything (in your estate) above $1 million will be taxable, and the highest estate tax rate will rise from 35 percent to 55 percent.
"It used to be that we didn't worry too much about people having a million dollars in assets, but that's not difficult to do today," Alpern said.
"Estate tax has to be paid in cash within nine months of the date of death," he said.
For families inheriting unplanned estates, that often means scrambling to sell off assets in order to pay estate taxes.
Alpern recommends two main ways to manage your taxable estate.
"First, give assets away before you die, as long as you retain enough to live on even if your health deteriorates," he said. "There are many ways to do that.
''After this year, you'll be able to gift away up to $1 million over your lifetime or when you die. You're also allowed to give away up to $13,000 per recipient per year. Plus, you can give away unlimited amounts for health and tuition."
By giving assets away, the total value of the estate is reduced, which means lower estate taxes.
"The second way for people to make arrangements to pay estate taxes is to acquire life insurance. If it is arranged properly, life insurance can pay the estate taxes for the family with tax-free money," said Alpern. But he cautions that "the longer you wait to buy life insurance, the more expensive or unavailable it becomes."
For most people, the time to start planning an estate is now.
"It's never too early to start planning your estate," Sforza said. "Anyone with children or assets should have an estate plan."
According to Alpern, 75 percent of people in the United States die without an estate plan.
"If you have no estate plan, the state of Ohio creates one for you," Alpern said. "You don't want Ohio to decide who gets your estate. Everyone needs to have an estate plan to make sure that the inheritance you leave is a blessing, not a curse."