Imagine yourself striking up a conversation with the person sitting next to you on an airplane. You find out that they are an estate planning lawyer, and they are open to answering questions that you have about the subject.
This would be a great opportunity to walk away with some important information. In this post, we are going to provide a hypothetical discussion between a layperson and an estate planning attorney to give you some food for thought.
Do I have to be concerned about taxes on inheritances that I will leave to my loved ones?
For the most part, the answer is no. An inheritance that is received through the terms of a will is not considered to be taxable income by the IRS or the state tax authorities. This would also apply to life insurance proceeds.
Distributions of the principal in a living trust are not taxable, but a beneficiary would be required to report distributions of the trust’s earnings.
When a Roth individual retirement account is inherited by a beneficiary, the distributions are not taxable. This is because the contributions into the account were made with after-tax earnings.
Traditional individual retirement accounts work in the reverse manner. You fund the account before you pay taxes on the income, so distributions to the original account holder and a beneficiary would be subject to taxation.
An inheritor is not responsible for capital gains that accumulated during the life of the person that left them the appreciated assets. They would get a stepped-up basis, and they would only be responsible for future gains that are realized.
There is a federal estate tax in the United States, but most people do not have to pay it because there is an $11.7 million exclusion. This is the amount that can be transferred before the tax would potentially levied on the remainder.
We have a state-level estate tax to contend with here in Connecticut, and the exclusion is $7.1 million this year. The rate varies from 10.8 percent to 12 percent depending on the dollar value of the estate in question, but a flat rate of 12 percent will take hold in 2023.
Is a will the only document you really need?
This is one of the most commonly held misconceptions about estate planning process. You can facilitate asset transfers through the terms of a will, but a living trust will be a better choice for many if not most people.
When you have a living trust, you do not lose control of the assets because you would act as the trustee while you are living. This would be a revocable trust, so you can change your mind, rescind the trust, and take back direct personal possession of the assets.
One of the major benefits that you gain through the utilization of a living trust is probate avoidance. A will is admitted to probate, which is a time-consuming and expensive legal process.
When a living trust is administered, the probate court is not involved, so the administration phase is simplified and streamlined. The principal would be protected from the beneficiary’s creditors, and you can dictate the terms of the distributions.
If you want to provide a certain amount each month or set up some different type of incremental payout arrangement, you have that freedom. On the other hand, if you use a simple will with no trust, the inheritors would receive lump sum inheritances.
In addition to asset transfers, your estate plan should include an incapacity component. You should have a living will to state your life support preferences and a durable power of attorney for health care to name someone to make medical decisions on your behalf.
If you have a living trust, you can name a disability trustee to act as the administrator in the event of your incapacity. Your estate plan can include a durable power of attorney for property to name someone to manage property that is not held by a trust.
Does Medicare pay for a stay in a nursing home?
Most seniors will need some type of paid living assistance, and 35 percent of elders will require nursing home care. Medicare does not pay for the custodial care that these facilities provide.
Medicaid will pick up the tab if you can gain eligibility. Even though it is a need-based program, you could fund an irrevocable Medicaid trust to shape a financial profile that will lead to eligibility in the future.
Schedule a Consultation Today!
We are here to help if you are ready to work with a Glastonbury, CT estate planning lawyer to put a custom crafted plan in place. You can send us a message to set up a consultation appointment, and we can be reached by phone at 860-548-1000.