A lot of people that know they should put estate plans in place procrastinate because they don’t know where to begin. This is understandable to some extent, and with this in mind, we are going to share 3 key estate planning tips that should help you get started.
Taxation is probably not going to be a factor.
When you think about transferring a significant amount of property, taxation will probably enter your mind. This would certainly apply to the estate planning process, but in fact, the news on this score is rather good.
We do have a federal estate tax in the United States, but most people do not have to pay it, because there is a high credit or exclusion. This is the amount that can be transferred before the estate tax would potentially be applied on the remainder.
In 2023, the estate tax exclusion is $12.92 million, and the maximum rate is 40 percent. There is a gift tax in place to stop people from giving gifts to avoid transfer taxes, so the exclusion applies to lifetime gifts and your estate.
However, there is a separate $17,000 per year, per person gift tax exclusion. You can give this much to any number of people in a calendar year free of transfer taxes without using any of your multi-million dollar unified exclusion.
On the downside of the equation, there are 12 states in the union that have state-level estate taxes, and New York is one of them. The exclusion on the state-level is just $6.58 million, so your estate can be exposed the state tax even if it is exempt on the federal level.
For the most part, inheritances are not subject to regular income taxes. One exception would be distributions of the earnings that are generated by a trust.
If you inherit a traditional individual retirement account, you would pay taxes on the distributions, because these accounts are funded with pretax earnings. Distributions from a Roth individual retirement account are not taxable.
Don’t assume a simple will is the right asset transfer vehicle.
Contrary to popular belief, there are good reasons to use a trust instead of a will even if you are not a multimillionaire. One of the drawbacks of a will is the fact that you would be allowing for lump sum inheritances to the beneficiaries, and this may not be consistent with your wishes.
A will is admitted to probate, which is the legal process of estate administration. The court provides supervision while the estate is being administered by the executor.
This process will take about eight or nine months at minimum in most jurisdictions, and no inheritances are distributed during this interim. Expenses that accumulate during probate reduce the value of the estate, and privacy is lost, because probate records are public.
If you use a living trust instead of a simple will, you can steer clear of these negatives. The trustee would distribute the assets outside of probate, and you could instruct the trustee to provide limited distributions over an extended period of time.
A living trust is the device that is suitable for the widest range of people, but there are other types of trusts that can be utilized to satisfy certain targeted objectives.
Prepare for end-of-life eventualities.
Your estate plan should address the possibility that you may not be able to communicate sound decisions toward the end of your life. Clearly, this is not a pleasant subject to contemplate, but it is one of those inconvenient truths.
You can state your life support preferences in a living will, and you can execute a durable power of attorney for health care to name a representative to make medical decisions on your behalf. The decision-making power would apply to matters that are not addressed in the living will.
If you have a living trust, you would act as the trustee while you are alive and well, you would name a disability trustee to assume the role if it ever becomes necessary. To account for property that is not held by a trust, you can name an agent in a durable power of attorney for property.
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You are in the right place if you are looking for a Manhattan, New York estate planning lawyer. Before you take any further action, absorb the information in our on-demand webinar. You will learn a lot when you view it, and you can click this link to obtain access. If you enjoyed these 3 key estate planning tips or have other questions, please reach out to our office at (212) 973-0100.