A survey that was conducted last year found that most people without estate plans know that they are putting an important responsibility of the back burner. Many of them fail to take action because a lack of information leads to procrastination.
With this in mind, we will provide some tips that should help you envision a basic outline of your estate plan.
Don’t fret about taxation unless you are a multimillionaire.
Taxes will usually enter the picture when assets are changing hands, so this would naturally be a source of concern. Fortunately, if you are like most people, taxation will not impact the inheritances that your family members will receive.
There is a federal estate tax, but there is also an exclusion. This is an amount that can be transferred tax-free before the estate tax would potentially be levied on the remaining portion.
At the present time, the exclusion is a record high $11.7 million. Under currently existing laws, this hefty exclusion will remain in place through 2025 with annual adjustments to account for inflation.
In 2026, it is scheduled go down to $5.49 million, so this is something to keep in mind if you are in possession of a significant amount of wealth.
There has been a gift tax in place continuously since 1932 to prevent people from giving gifts to get around transfer taxes. This tax is unified with the estate tax, so the $11.7 million exclusion applies to lifetime gifts and the estate that will be transferred after your death.
Inheritances are not considered to be taxable income by the IRS or the state income tax authorities with a couple of exceptions. If you are the beneficiary of a living trust, distributions of the principal would not be taxed, but distributions of the earnings would be taxable.
Since traditional individual retirement accounts are funded with pretax earnings, distributions to the original account holder or a beneficiary are taxable. Roth accounts are funded after taxes have been paid on the income, so distributions are not taxable.
Inherited appreciated assets get a stepped-up basis. This means that the inheritor does not have to pay capital gains taxes on the appreciation that took place during the life of the decedent.
President Biden has proposed an elimination of the step-up in basis, and this is a fluid matter that we will monitor closely.
A living trust is usually a better choice than a simple will.
One of the most widely held misconceptions about estate planning is the idea that trusts are only useful for very wealthy people that have estate tax concerns. They think that a simple will can suffice, but in reality, the administration of a will is not a simple as you may think.
If you use a will to state your final wishes, you would name an executor to act as the administrator. They would be required to admit the will to probate, and the court would supervise during the estate administration phase.
No inheritances are distributed until probate has run its course, and it will usually take about nine months at minimum. Anyone that is interested can access the records to find out how the assets were distributed, and probate expenses consume part of the estate.
Another negative is the fact that you would be providing lump sum inheritances to the beneficiaries with no asset protection or spending safeguards.
On the other hand, if you use a revocable living trust as the centerpiece of your plan, you could include spendthrift protections. Plus, the assets would be distributed to the beneficiaries outside of probate, so the pitfalls would be avoided.
A living trust is one possibility, but there are other types of trusts that can be utilized by people that are not necessarily among the financial elite.
Include an incapacity planning component.
Unfortunately, a significant percentage of elders become unable to communicate sound decisions at some point in time. As a response, you should proactively embed an incapacity preparation plan within a broader estate plan.
You should execute a living will to record your life support preferences, and you can name an agent to make other types of medical decisions on your behalf in a durable power of attorney.
In addition to the health care power of attorney, you can empower a financial decision-maker in a durable power of attorney for property.
If you have a living trust, you would act as the trustee while you are alive and well, and you would name a disability trustee to assume the role in the event of your incapacity.
We are here to help!
Our doors are open if you are ready to work with a Staten Island estate planning attorney to put a plan in place. You can send us a message to request a consultation appointment, and we can be reached by phone at 332-456-0500.