With this in mind, let’s look at five questions you can consider to jumpstart your estate planning efforts.
Are you concerned about the money management capabilities of your heirs?
It can be disconcerting to leave a significant inheritance to someone that is inexperienced or irresponsible with money. If there are people on your inheritance list that fit one of these descriptions, you may have reservations about leaving them lump sum bequests.
As a response, you could establish a living trust with a spendthrift provision. After your passing, the trust would become irrevocable, and the principal would be out of the reach of the beneficiary’s creditors.
You could leave instructions for the trustee with regard to the nature the distributions. For example, you could allow for distributions of the earnings each month, and you could include portions of the principal if you choose to do so.
In this manner, the beneficiaries would not be able to burn through their inheritances too quickly. Since people tend to mature over time, you could provide larger distributions of the principal when the beneficiaries reach certain age thresholds.
Will your estate be exposed to taxation?
The matter of taxation should also be taken into consideration. Generally speaking, bequests are not subject to regular income taxes, but there are some exceptions.
Distributions of the principal from a living trust are not taxed, but distributed interest is taxable.
If you have a traditional individual retirement account, you fund the trust with pretax earnings, so the distributions are taxable. The same thing applies to the beneficiaries of these accounts.
On the other hand, Roth account beneficiaries pay no income taxes, because this type of account is funded after taxes have been paid on the earnings.
Inherited assets get a step-up in basis, so inheritors are not responsible for capital gains that accumulated during the decedent’s life.
There is a federal estate tax that can take a big bite out of your legacy if you are exposed, because it carries a 40 percent top rate. The exclusion is the amount you can transfer before the tax would be applicable on the remainder, and it stands at $11.7 million in 2021.
It is scheduled to go down to $5.49 million at the beginning of 2026, so you should keep this in mind if the reduction would impact you. We should point out the fact that there is a gift tax that is unified with the estate tax, so the exclusion applies to large gifts and your estate.
There are 12 states in the union that have state-level estate taxes, and Vermont is one of them. The state level exclusion is $5 million, so you can be exposed to the Vermont estate tax even if you are exempt on the federal level.
Are you prepared for long-term care costs?
More than one third of senior citizens will reside in nursing homes eventually, and Medicare does not pay for the custodial care that nursing facilities provide. Long-term care costs are very high, so this is a matter that deserves your attention.
Medicaid will cover a stay in a nursing home, and you can convey assets into an irrevocable trust to develop a financial profile that will lead to eligibility. Advance planning is key, because the trust must be funded at least five years before you apply for Medicaid.
Who will manage your affairs in the event of your incapacity?
Alzheimer’s disease strikes over 30 percent of people that are 85 years of age and older, and this is not the only cause of cognitive impairment. The state could appoint a guardian to act on your behalf if you become incapacitated, and this would not sit well with many people.
As a response, you can execute a durable power of attorney for property to name someone to manage your financial affairs if it becomes necessary. If you have a living trust, you can name a disability trustee to assume the role.
For health care decision-making, you can name an agent in another durable power of attorney, and you can add a living will to state your life support preferences.
Why procrastinate when help which is just a phone call away?
The last question is a rhetorical one. If you reach out to us, we can help you devise a plan that is custom crafted to suit your needs.
You can schedule a consultation appointment at our Burlington, Vermont estate planning office if you call us at 802-879-7133. There is also a contact form on this site you can use to send us a message, and if you reach out electronically, you will receive a prompt response.
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