A lot of people that do not have estate plans in place procrastinate because they view the process as overwhelming, and they don’t know where to start. When you have a simple framework to follow, you can get past the inertia, and we will provide three easy steps in this post.
Assess the Value of Your Assets
If you are going to be slicing and distributing a pie, you have to gain an understanding of its size, so this is the first order of business. You should inventory the assets that are likely to be part of your estate and make protections for the future.
This is important in a general sense, but there is a specific reason why you should estimate a dollar amount. There is a federal estate tax in the United States, and it can have a significant impact on people that have been very successful financially.
It carries a 40 percent maximum rate at the present time, and it can be levied on the portion of an estate that exceeds $11.7 million. This figure is called the federal estate tax credit or exclusion, and it is at a record high right now.
An $11.18 million exclusion was established for 2018 when the Tax Cuts and Jobs Act was enacted at the end of 2017. The provision that impacts the exclusion is going to sunset at the end of 2025, and it will plummet to $5.49 million on January 1, 2026.
This is a compelling trajectory, but it could get worse for high-net-worth individuals. Senator Bernie Sanders has introduced the For the 99.5 Percent Act, and it would lower the exclusion to $3.5 million.
Here in Vermont, we have a state-level estate tax to contend with as well, and the current exclusion is $5 million. The rate is a flat rate of 16 percent for the portion of an estate that exceeds this amount.
There are some other states in the union that have state-level estate taxes, and if you own valuable property in one of the states, the tax in that state would apply to you. This is something to research if you are in possession of property that is located out-of-state.
There is also the matter of the capital gains tax and the step-up in basis. As the law stands today, appreciated assets get a stepped-up basis, so the inheritor is not responsible for capital gains that accumulated during the life of the decedent.
The White House would like to eliminate the step-up in basis for transfers that exceed $1 million, so this is another matter to monitor over the coming months and years.
Make Inheritance Determinations
When you have a pretty good idea of what you have to give, you have to decide how it is going to be distributed among the people that you love. This is part of the process in a broad sense, and you should consider the personal proclivities and life situation of the individuals on the list.
If you will be leaving a bequest to someone that is not good with money, you may not want to leave a lump sum with no protections. Under these circumstances, you can make the person the beneficiary of a revocable living trust with a spendthrift provision.
You would act as the trustee while you are living, and after you pass away, the trust would become irrevocable. The successor trustee that you name would administer the trust, and the principal would be protected from the beneficiary’s creditors.
When you are establishing the terms, you can instruct the trustee to distribute a certain amount each month to prevent reckless spending, or you can dictate some other distribution arrangement.
An incentive trust can be used to guide someone toward positive behavior or away from self-destructive actions. You could use a supplemental needs trust to provide for someone with a disability without impacting government benefit eligibility.
These are a handful of the scenarios that can exist, and there are always going to be solutions, so you should identify your goals as you prepare for the next step.
Consult With an Estate Planning Attorney
When you know what you want to accomplish, it is time to work with an attorney from our firm to put a plan in place. We can gain an understanding of your situation and make recommendations so you can go forward with a custom crafted plan that ideally suits your needs.
Whenever you are ready, you can schedule an appointment at our Essex Junction, VT estate planning office if you call us at 802-879-7133. If you would rather reach out electronically, fill out our contact form and we will get back in touch with you promptly.