People sometimes make assumptions about estate planning that are based on misunderstandings. There are many reasons for this, and terminology is one of them.
Some of the terms that are often used sound similar, but in actuality, they are not synonymous. We will look at some of them in this post.
Living Trust and Living Will
Everyone knows that a simple will is a document that is used to express your choices with regard to the way your estate will be distributed after your passing. You make and record your decisions while you are alive, and they are honored after your death.
Because of this, some people think that the term “living will” describes the simple will that is used to arrange asset transfers. In fact, this is an advance directive for health care that has nothing to do with financial matters.
You state your wishes with regard to the use of feeding tubes, artificial hydration, resuscitation, and mechanical respiration when you draw up a living will. Your organ and tissue donation choices and comfort care medication preferences can be included as well.
When you have a living will in place, your closest relatives will not be forced to make these life-and-death decisions on your behalf.
A living trust is an asset transfer vehicle that is created while you are still alive. When you establish this type of trust, you will be the trustee throughout your life. You name a successor trustee when you are establishing the trust, and you designate beneficiaries.
There are those that assume that a living trust and a living will accomplish the same exact things in the same way. They are both asset transfer vehicles, but there are some significant differences, and the nature of the estate administration process is at the top of the list.
If you state your final wishes in a revocable living trust, the trustee will distribute assets to the beneficiaries outside of probate. This is a costly and time-consuming legal process that strips your family of privacy, because the records are available to the public.
On the other hand, a will would be admitted to probate, and the drawbacks would enter the picture. Another difference is the nature of the distributions. The inheritors receive lump sums with no spending safeguards when a will is used. When you have a living trust, you can include spendthrift protections.
Inheritance Tax vs. Estate Tax
It is understandable if you were to assume that an inheritance tax and an estate tax are interchangeable terms that describe the same type of tax. Actually, there are major differences.
An estate tax is levied on the entire taxable portion of an estate before it is distributed to the heirs. The “taxable portion” part is key, because there will be an exclusion. This is an amount that can be transferred for the tax is levied on the remainder.
Estate taxes typically target high net worth individuals, so the exclusions are relatively high. On the federal level, the exclusion is $12.06 million in 2022. There is a state-level estate tax in Connecticut, and that exclusion is $9.1 million this year.
There is no federal inheritance tax, but there are six states with state inheritance taxes. This type of tax is levied on distributions to each individual inheritor rather than the entirety of the estate. Plus, in general, there are no large exclusions, but there are exemptions.
Close relatives like children, spouses, grandchildren, parents, and grandparents are typically exempt, but it depends on the law in each respective state.
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When you work with one of our Glastonbury, CT estate planning attorneys to develop your plan, there will be no guesswork involved. All of your questions will be answered thoroughly, and you will receive recommendations based on your situation.
At the end of the process, you will emerge with a tailor-made estate plan that ideally suits your needs. If you are ready to get started, you can send a message to request a consultation appointment or we can be reached by phone at 860-548-1000.