Too many people are busy making money, and too few people learn how to protect them from government claims.
The thought of someone we love dearly passing away is not an enjoyable thought that many people would like to dwell upon. Perhaps this is why many people fail to properly do estate planning until it’s too late.
Take, for example, the cautionary tale of a client of ours, Mrs. Zhang. Mrs. Zhang had a happy marriage with her husband, Mr. Feng. Mrs. Zhang and Mr. Feng, however, never did any estate planning while the latter was alive. Mr. Feng had an estate that was valued at $520,000. However, the entire estate was solely under his name, which, as a result of not making the proper preparations, would prove to be an issue for his wife after he sadly passed away.
Domiciliary makes a big difference
Mr. Feng was not what is considered by the US government a “US domiciled individual.” In order to be considered domiciled in the United States, a person’s principal residence must be located in the US and must also be where they plan to reside for the foreseeable future. As of 2020, the first $11.58 million of someone’s estate is exempt from the federal estate tax if they are a US domiciled individual. However, the exemption amount for non-US domiciled individuals is significantly less. Only $60,000 of one’s estate is exempt from the estate tax in this situation.
Another mistake that Mrs. Zhang made was that she didn’t immediately have her husband’s estate processed after he passed away. If an individual waits too long to process an estate, the government will impose a financial penalty for failing to file and end up taking even more of the estate. And to add insult to injury, the longer the wait is, the more interest will be accrued as well.
“In this world nothing can be said to be certain, except death and taxes.” -- Benjamin Franklin
As a result of a combination of the estate tax, penalty, and interest, the US government ended up taking over a whopping $230,000 of the $520,000 of the estate. Let this be a lesson taken to heart, that you should always make sure to do estate planning and to process your estate as soon as possible. Simply because of not doing this, your loving family that you’re responsible for could lose so much of what you would have otherwise been able to give them. Because of one mere mistake, so much of the toil and drudgery that you put into your life, all that you worked so hard for, could end up wasted, exsanguinated from your metaphorical corpse by the pen of a faceless government bureaucrat as now not only you have died, but your legacy as well.
If Mrs. Zhang and her husband had done estate planning before he passed away instead of coming to us years after Mr. Feng's decease, they would likely have been made aware about this state of affairs, and with a plan they might have been able to avoid the tax at all. For such certain things that we have to deal with, surely it’s sensible to adequately prepare for them well in advance.
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