It’s summer, but you may be “frozen” by the sheer number of options when it comes to estate planning! Most people simply do not know where to start. Don’t be overwhelmed; in this post we’ll give you three solid tips on how to start your estate plan.
1) Don’t be overly concerned about taxation.
Sometimes simplicity is best. Most people envision a tangled web of taxation, but the reality is that the vast majority of estates will be transferred tax-free. There is a federal estate tax, but relatively few families need to be concerned about it due to the tax exclusion.
What does this mean? The estate tax exclusion that can be used to transfer a certain amount tax-free, and the tax would potentially be levied on the remainder. In 2022, the federal estate tax exclusion is approximately $12,000,000 dollars. Yes, that’s $12 million.
Speaking of 12, there are 12 states in the union that have their own estate taxes. Luckily for us, Texas is not one of these 12. However, if you own property in a state that has its own estate tax, their taxes will apply to you if the value of your property in that estate excludes their exclusion amount.
State-level exclusions are generally much lower than the federal exclusion. For example, the lowest is approximately $1 million in Massachusetts and Oregon, while Connecticut has the highest exclusion at around $7 million.
What about the people who will receive your estate? An inheritance is not considered to be taxable income by the IRS– unless you are receiving distributions of earnings that are generated by assets in the trust, that is. If you inherit appreciated assets, then you are not required to pay capital gains taxes on the appreciation.
Beneficiaries of a Roth individual retirement account not pay taxes on the distributions. However, distributions to beneficiaries of a traditional account are taxable.
2) A simple will is probably not the right asset transfer vehicle.
We hear this all the time: “why don’t I just get a simple will?” Many of our clients and friends started out thinking that advanced estate planning was a luxury for the ultra-wealthy. Unfortunately, a “simple” will can lead to complicated administrative issues. Consider the probate process itself, for example.
What is probate? Probate is the legal process of estate administration, which typically takes place under the supervision of a court. Though there are some exceptions for small estates in Texas, a will would generally be admitted to probate. This begins a time-consuming process.
The timeline alone can cause issues and stress for participants in probate. Even worse, probate expenses reduce the value of the estate. Anyone who is either interested or nosy can access probate records to dig into the details of your estate and what you gave to everyone. This can have significant privacy implications, such as providing targets for scammers and con artists. After all, they know that someone just had a financial windfall– and exactly how much that person received!
Aside from the obvious drawbacks of probate, you would also be allowing for the distribution of inheritances as lump sum amounts if you use a will as your exclusive asset transfer vehicle. This may be a source of concern if you have someone on your inheritance list who is not good with money. I’m sure we all know of someone who has blown through their inheritance on get-rich-quick schemes, gambling, drugs, or other vices.
The revocable living trust is a useful alternative to the simple will which we prefer here at the Slaton Schauer Law Firm, PLLC. It offers our clients some benefits over a typical will. One of the largest of these benefits is the avoidance of probate, because probate is not generally necessary in situations where a living trust was utilized.
Another benefit is the potential inclusion of a spendthrift clause, which helps to protect trust assets from your beneficiary’s creditors. You can instruct the trustee to distribute a certain amount of money each month, or you can dictate a more individualized distribution arrangement.
We have also included incentives on behalf of our clients, such as payouts when a beneficiary attains a certain age or obtains advanced degrees. We’ve even structured payments to help with the costs of graduate school and trade school.
The revocable living trust is our most common estate planning vehicle, but there are other trusts that can satisfy specific goals. A good estate planning attorney should get to know you, your family, and your situation in order to meet your individual objectives.
3) Prepare for possible incapacity.
Our final tip revolves around a rather disconcerting subject. A significant percentage of elders experience some form of cognitive impairment late in their lives, and age-related physical decline or medical ailments can make it impossible to communicate your needs and desires.
Advance directives can mitigate some of these issues. These are documents you will use to lay out your wishes while you are still relatively healthy and have the capacity to communicate your desires. One example of these documents is the living will, which is used to state your preferences on life support (among other possibilities). Do you wish to be placed on a ventilator? These documents will make your preference clear.
Another item to consider is the durable power of attorney. A durable power of attorney is used to name someone who can make medical decisions on your behalf if you are incapacitated. It’s wise to include a HIPAA release as well; without this release, your doctors cannot tell other people your medical information. Without this release, we can imagine a situation where doctors cannot divulge medical information to the person who is directing your care.
Finally, you can execute a durable power of attorney for property. This essentially mirrors the medical power of attorney, but is concerned with who will make financial decisions on your behalf and manage your monetary affairs. If you have a living trust, you can also name a disability trustee to assume the role if it ever becomes necessary.
We are here to help!
If you are ready to work with an estate planning attorney here in the Austin, Texas area we are here to help! We’ll get to know you and help to create a custom plan to protect your family and your legacy. Give us a call at 512-258-9455. You can also send us a message to request a consultation appointment.
Want to know more?
Please see our helpful articles on intestate distribution, Medicaid and your home, and a longer piece on the advantages of trusts.