A lot of people that know they should put an estate plan in place drag their feet because they have certain unanswered questions in their minds. In this post, we are going to share three tips that will help to demystify the process.
Taxation may not be a problem.
It is natural to assume that the tax man will want a share of your legacy, but in reality, this may not be the case at all.
A direct inheritance that is received through the terms of a will would not be subject to regular income taxes, and life insurance proceeds would fall into this category as well. Distributions of the principal in a living trust are not taxed, but distributions of the earnings are taxable.
Roth individual retirement accounts are funded after taxes have been paid on the income, so distributions to a beneficiary would not be taxed. The taxation works in the reverse manner which traditional accounts, so those distributions are subject to taxation.
Appreciated assets get a step-up in basis, so an inheritor is not required to pay capital gains taxes on gains that accumulated during the life of the decedent.
There is a federal estate tax that can have a significant impact on your legacy if you are exposed, because there is a 40 percent top rate. The good news is that the first $11.7 million can be transferred tax-free, and the estate tax would be applied on the remainder.
We have a state-level estate tax to contend with here in Connecticut, and the exclusion amount is $7.1 million. Connecticut is the only state in the union with a state-level gift tax, so you cannot give gifts to avoid this tax.
A living trust is a better choice than a simple will.
The revocable living trust is the estate planning device that is ideal for the widest range of people. When you have a living trust, you would act as the trustee while you are living, so you would be at the helm every step of the way.
You would have the ability to dissolve the trust if you ever choose to do so, and you can make changes to the terms at any time.
A successor trustee that you name would act as the administrator after your passing, and of course, your heirs would be the beneficiaries. When you have a living trust, you do not have to provide lump sum inheritances with no spending safeguards.
If you have concerns, you can include a spendthrift provision, and the principal would be protected from the beneficiaries’ creditors after your death. You could instruct the trustee to distribute assets incrementally over time to prevent reckless spending.
The administration process would not be subject to probate if you use a living trust. This is a costly and time-consuming legal proceeding that would be necessary if you state your final wishes in a simple will.
In addition to the probate avoidance, the estate administration process is further streamlined by the fact that the trust would own the assets that comprise the estate. You can add a pour-over will to allow the trust to absorb assets that you failed to convey into it while you were living.
You should include an incapacity planning component.
Over 30 percent of people that are 85 years of age and older have Alzheimer’s disease, and there are other afflictions that can cause physical and/or mental incapacity.
To account for this possibility, your plan should include an incapacity planning component. When it comes to financial matters, you can name a disability trustee if you have a living trust.
A durable power of attorney for property can be added to name an agent to manage property that is not held by a trust. When you have these documents in place, you will prevent a conservatorship proceeding.
Advance directives for health care should also be part of the plan. You should state your life support preferences in a living will, and you can use a durable power of attorney for health care to empower someone to make medical decisions on your behalf.
We Are Here to Help!
We are ready to spring into action if you would like to work with a Hartford or New Haven 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.
Mr. Nirenstein is licensed to practice before the courts of the State of Connecticut and the United States District Court. He is a member of the Connecticut and Hartford County Bar Associations, and the Estate and Probate, Elder Law, Business Law and Real Estate Sections of the Connecticut Bar Association.
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