What Is Included in an Estate?
At the most basic level, a person’s estate includes everything that person owns. The estate owner’s possessions may include:
- real estate (a home or vacation home, office building, condo, timeshare)
- personal property (cars, furniture, clothes, jewelry, other collectibles)
- intangible property (bank accounts, investment portfolios, retirement accounts, life insurance policies, annuities)
- business interests (ownership or partial ownership in a business)
Even without being one of the ultra-rich, a business owner is likely to have accumulated a sizable estate. Estate planning gives the business owner the opportunity to protect those assets during life and control what happens to them after death.
Adding to the Estate
In addition to assets in a person’s possession at the time of death, there is often income that the person earned but had not yet received at the time of death. These assets are also included in the estate. While this income has the cumbersome name “income in respect of a decedent,” the idea is straightforward. Consider some common “income in respect of a decedent” items:
- a final paycheck or bonus check
- deferred compensation benefits
- accrued interest
- rent (if the deceased was a landlord)
- assets from retirement plans, IRAs, and annuities
This income is taxable to the decedent, whether it passes to the estate or a beneficiary. When the beneficiary receives it, it is taxed a second time. To offset the double tax, the beneficiary may take a deduction for the estate tax paid. The graphic below provides a good review.
Reducing the Estate: Estate Expenses
A typical estate also faces a variety of expenses, and most are due almost immediately after death. These expenses can add up to a substantial sum.
- Probate charges. These include court costs, attorneys’ fees, executors’ commissions, administrative costs, appraisers’ fees, and accountants’ fees. Probate costs vary significantly by state. Unless the estate is complex or the plan is ambiguous or nonexistent, probate costs typically run between 3 percent and 7 percent of the total estate. For a $1 million estate, that could mean costs of between $30,000 and $70,000—and that’s without any complications.
- Debts. The estate must settle all debts of the deceased, including mortgages, car loans, and credit card debt.
- End-of-life medical expenses. Medical expenditures are usually highest in the last few months of life. Expenses to maintain a patient in intensive care can cost up to $10,000 per day (although that amount is more common on day one, with costs in the $3,000 to $5,000 range after that). Unfortunately, statistics show that is where nearly 20 percent of Americans spend their final days.
- Funeral expenses. Although a cremation, without a service, can be done for just over $2,000, a traditional funeral and burial typically runs over $10,000, including the casket, vault, and grave (but not cemetery costs).
- State death and inheritance tax. Not all states have an estate tax. For states that do, the severity and nature of the tax will differ from state to state. However, many people who will not owe federal estate tax will still owe state estate tax. Even though state inheritance and estate tax rates may not be as high as the federal estate tax rate, they vary and they can be significant.
- Federal estate tax. The federal government imposes an estate tax on the transfer of property at death. For people with substantial estates, this can easily be the single largest cause of estate shrinkage. Only estates valued at over $12,920,000 (the exemption amount for 2023) need to file an estate tax return. Anything over the exemption amount is taxed at the top estate tax rate of 40 percent. While this exemption is quite large, people—especially business owners—sometimes find they have more sizable estates than they realize. A home, vacation home, cars, jewelry, investments, retirement accounts, plus the value of the business can all add up. In addition, not only is the federal estate tax law complex, it is always subject to change, so there’s no reliable way to predict what the future will bring.
At Islamic Wills Trust Services we have a team of experienced attorneys who can help you set up an Islamic living trust tailored to your unique needs and circumstances. Contact us today to learn more about how we can assist you in protecting your assets for generations to come.
Schedule your free consultation in our offices in Maryland and Virginia or in your house or online. We’re also available to meet on weekends and after working hours. You may schedule your consultation by calling us at 855-559-4557 or by emailing us at email@example.com. Appointments are typically scheduled two weeks in advance.