In this post, we will provide four questions for you to think about. When you come up with the answers, you will have a better idea of what your estate plan will look like when you take action.
Are estate taxes going to be a concern?
Most of the tax laws are favorable when it comes to asset transfers after someone passes away. If you receive insurance policy proceeds or an inheritance through the terms of a will, you would not be required to report the income when you file your taxes.
Distributions of the principal from a living trust are not subject to taxation, but distributions of the earnings are taxable. Inherited assets get a stepped-up basis, which means that the inheritor is not responsible for capital gains that accumulated during the life of the decedent.
A traditional individual retirement account beneficiary would be required to report the income, because these accounts are funded with pre-tax earnings. The arrangement is reversed for Roth accounts, so beneficiaries receive distributions tax-free.
There is a federal estate tax that carries a 40 percent rate, but there is a relatively high exclusion. This is the amount that can be transferred tax-free before the tax would be levied on the remainder, and in 2021, it is $11.7 million.
It is scheduled to go down to $5.49 million in 2026, so you should implement a tax efficiency strategy before that time comes if you are exposed to the tax.
There is also a federal gift tax that is unified with the estate tax, so the exclusion encompasses large gifts along with your estate.
Here in Connecticut, we have a state-level estate tax to contend with as well. The exclusion in 2021 is $7.1 million, and the rate is between 10.8 percent and 12 percent depending on the value of the estate.
As luck would have it, Connecticut is the only state in the union with a gift tax, so you cannot give gifts to avoid the death tax.
Are there reasons why you do not want to provide inheritances all at once with no strings attached?
This is a key question, because there are different ways to facilitate asset transfers. If you want to make sure that your loved ones do not burn through their inheritances too quickly, you could establish a living trust with a spendthrift clause.
You would not lose control of the assets while you are living, because you would act as the trustee. When you establish the trust, you would name a successor trustee to assume the role after your passing.
After your death, the trust would become irrevocable, and the beneficiaries would not have access to the principal. Their creditors would be in the same position, so there would be asset protection on that level.
You could leave instructions for the trustee with regard to the nature the distributions. For example, you could provide a certain amount each month until the beneficiaries reach certain age thresholds.
A different type of trust called a supplemental needs trust can be used to provide for a loved one with a disability that is relying on government benefits. The trustee would use the assets to make the beneficiary more comfortable, but benefit eligibility would not be affected.
These are two of the scenarios that can call for targeted solutions, but there are others.
Have you considered potential long-term care costs?
Over 30 percent of seniors will eventually reside in nursing homes, and others will need different types of paid care. Medicare does not pay for custodial care, and long-term care is extremely expensive.
Medicaid does cover custodial care, and you could convey assets into an irrevocable trust to create a financial profile that will lead to Medi-Cal eligibility. However, the trust must be funded at least five years before you apply, so advance planning is key.
Are you prepared for incapacity?
There is an unpleasant truth about aging that people do not like to think about. Alzheimer’s disease is relatively common among elders, and it is not the only cause of cognitive impairment.
If you become unable to handle your affairs and you make no preparations in advance, the state could appoint a conservator to act on your behalf.
You can take the matter into your own hands and assert your choices if you execute a durable power of attorney for health care and a durable power of attorney for property.
The agents that you name would be able to make decisions on your behalf if you become unable to make them yourself, and a living will can be added to state your life support preferences.
Schedule a Consultation Today!
We are here to help if you would like to work with a Hartford, Connecticut 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 860-548-1000.