You board a plane for a cross-country trip, and you settle into your seat. A woman sits down next you, and you exchange pleasantries. After you have been in the air for a while, you start to have a conversation.
It turns out that she is an estate planning lawyer, and she is willing to talk about her job. For the next few hours, you have the ability to ask her questions.
In this post, we will share a hypothetical exchange of this nature to give you some insight into the estate planning process.
When is it time to put an estate plan in place?
As soon as you are a self-supporting adult, you should cover the basics. You should carry sufficient life insurance to cover your final expenses, and you should have a will or trust to facilitate asset transfers.
Another element that some people overlook is the incapacity planning component. Advance directives for health care are important, and one of them is a living will. You state your wishes regarding the use of life-support methods in this document.
A durable power of attorney for health care should be added to name someone to make medical decisions on your behalf that are not related to life-support. You can also empower someone to act as your financial representative in a durable power of attorney for property.
If you get married, estate planning becomes that much more important, and it is absolutely essential for the parents of minor children.
Trusts are only for people that are very wealthy, right?
This is probably the most common misconception in the estate planning realm. In fact, a revocable living trust is the ideal estate planning tool for a wide range of people that are not extraordinarily wealthy.
If you use a will instead of a living trust, the executor that you name would admit the document to probate. This is a time-consuming process, and inheritances are not distributed until the estate has been probated by the court.
Expenses that accumulate reduce the value of the estate, and there is a loss of privacy because probate is a public proceeding. When a living trust is utilized, the beneficiaries receive the assets outside of probate, so the administration process is simplified and streamlined.
This is one major benefit that living trusts provide, and there are additional advantages. The living trust is the trust that is most commonly used, but there are other trusts that can satisfy specific objectives.
Will my estate be taxed?
The tax situation is favorable for most people. An inheritance that is received through the terms of a will is not taxable income, and this also applies to distributions of the principal in a living trust. If a trust beneficiary receives interest distributions, this would be taxable income.
A beneficiary of a traditional individual retirement account must report the income, but Roth account beneficiaries receive their distributions tax-free. This is because the former type of account is funded with pretax earnings, and Roth accounts are funded with after-tax earnings.
If you leave someone assets that appreciated during your life, they would get a stepped-up basis. The beneficiary would not pay capital gains taxes on the appreciation that accumulated while you were living, but they would be responsible for future gains.
There is a federal estate tax with an $11.7 million exclusion in 2021. This is the amount that can be transferred tax-free before the estate tax would be applicable on the remainder. The top rate of the tax is a robust 40 percent.
This exclusion is going down to $5.49 million in 2026 when a provision in the Tax Cuts and Jobs Act expires, so this is something to keep in mind.
We have a state-level estate tax here in Vermont with a $5 million exclusion. There are 11 other states that have state-level estate taxes, and if you own property in one of these states, the tax in that state would be applicable if its value exceeds the exclusion in that state.
We Are Here to Help!
If you are ready to have an actual conversation with a Burlington, Vermont estate planning attorney, we are ready to meet you. You can schedule a consultation appointment if you call us at 802-879-7133, and you can use our contact form if you would rather send us a message.