Some people drag their feet when it comes to estate planning because they don’t have enough basic information. With this in mind, we will provide a few tips in this post to give you some foundational knowledge to draw from going forward.
Don’t fret about taxation unless you are a multimillionaire.
You may assume that estate planning involves complicated steps that must be taken to minimize tax exposure. In reality, the tax situation for the vast majority of people is very favorable.
There is a federal estate tax, but there is an exclusion that gives you the ability to transfer a certain amount tax-free. The portion of an estate that exceeds the exclusion would potentially be subject to taxation.
In 2023, the federal estate tax exclusion stands at $12.92 million. There are 12 states that have state-level estate taxes, and Connecticut is one of them. The exclusion in Connecticut is now equal to the federal exclusion, and this is a new development that went into effect this year.
A direct inheritance that is received through the terms of a will would not be subject to regular income taxes, and life insurance proceeds are not considered to be taxable income.
If you are the beneficiary of a living trust, distributions of the principal would not be taxed, but you would have to report distributions of the earnings.
Inherited appreciated assets get a stepped-up basis, so the inheritor is not responsible for capital gains that accumulated during the life of the decedent.
A traditional individual retirement account is funded with pretax earnings. As a result, distributions to the original account holder and the beneficiary would be subject to regular income taxes. Roth accounts are funded with after-tax income, so distributions are not taxable.
Don’t assume a simple will is the right asset transfer vehicle.
A will can seem like a simple document that will facilitate quick and efficient transfers to your loved ones after you are gone. In reality, this is a widely held misconception.
When a will is used, the testator will name an executor as the administrator. After the testator’s passing, the will would be admitted to probate, and the court would supervise the estate administration process.
No inheritances are received while the estate is being probated by the court, and it will take eight months at minimum in most jurisdictions. Probate expenses reduce the value of the estate, and anyone that has an interest can access probate records, so there is a loss of privacy.
If you use a living trust as the centerpiece of your estate plan, you would act as the trustee while you are living, so you would maintain control of the assets. After you are gone, the successor trustee that you designate would distribute assets to the beneficiaries outside of probate.
A living trust is the most widely utilized alternative to a simple will, but there are other trusts that can be used to satisfy various different targeted objectives. Since there are so many tools in the toolkit, you should consult with an attorney so you can make fully informed decisions.
Prepare for possible incapacity.
Unfortunately, a significant percentage of seniors become unable to handle their affairs due to cognitive impairment or some other type of medical problem. To account for this, you should execute documents called advance directives for health care.
You should create a living will to state your life support preferences, and you can name an agent to make medical decisions on your behalf in a durable power of attorney for health care. A HIPAA release should be added to give your agent the legal right to access your medical records.
If you have a living trust, you can name a disability trustee to administer the trust if you become incapacitated. This can be the same individual or entity that will act as the successor trustee after your death, but this is not required.
To account for the management of assets that are not held by a trust, you can add a durable power of attorney for property.
Take action today!
The best advice we can give is to work with a Glastonbury, CT or Westport, CT estate planning lawyer to put a plan in place if you are currently unprepared. You can schedule a consultation appointment if you call us at 860-548-1000, and you can fill out our contact form to send us a message.
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.