With this in mind, we will share three tips in this post to clear up some of the unknowns.
You probably do not have to be concerned about taxation.
An influx of income will typically trigger taxation, so you will naturally be concerned about this when you are thinking about your estate. In fact, when it comes to inheritances, the tax situation is quite favorable all things considered.
Yes, there is a federal estate tax, and we have a state-level estate tax here in New York. However, there are exclusions that can be used to transfer a certain amount tax-free.
This figure is called the estate tax exclusion, and on the federal level, the exclusion in 2021 is $11.7 million. On the state level, the exclusion is $5.93 million this year.
If the value of your estate is in taxable territory, worry not, because there are estate tax efficiency strategies that can be implemented.
Moving on to other types of taxes, in most cases, you do not have to report an inheritance as income when you file your state and federal returns.
An exception would be distributions of the earnings that are generated by assets that are held by a trust. Distributions of the principal would not be taxable.
You would not be responsible for capital gains that accumulated during the life of someone that left you the assets, because you would get a step-up in basis. President Biden has stated that he supports and elimination of the step-up in basis, and this is a matter that we are monitoring closely.
Distributions to the beneficiary of a Roth individual retirement account are not taxable, because these accounts are funded with after-tax earnings. Since the tax situation is reversed with a traditional account, the distributions are considered to be taxable income.
A trust is preferable to a will in most cases.
The most widely held misconception in the estate planning realm is the notion that trusts are not useful for people of ordinary means. In fact, a revocable living trust is the ideal alternative to a simple will for a number of different reasons.
One of them is the streamlined estate administration process. When a will is used, it is admitted to probate, and the Surrogate’s Court will provide supervision while the estate is being administered by the executor.
It serves a purpose, because final debts are paid during probate, and the court examines the will to determine its validity. However, it will usually take nine months at minimum, and no inheritances are distributed during this interim.
If you use a living trust instead of a will as the centerpiece of your estate plan, the trustee that you name in the document would be able to distribute the assets outside of probate.
In addition to the revocable living trust, there are other types of trusts that can satisfy certain targeted objectives. You can use a supplemental needs trust to provide for a loved one with a disability without impacting need-based government eligibility.
An incentive trust can be utilized to guide an heir toward positive behavior or away from self-destructive actions. These are just a couple of additional examples, but there are other types of trusts that can be quite useful when certain circumstances exist.
Consider the eventualities you may face late in your life.
It is a disconcerting subject to address, but you should be aware of the fact that incapacity looms large for the oldest old. Over 30 percent of individuals that are 85 years of age and older have Alzheimer’s disease, and there are other causes of dementia.
The threat of cognitive impairment is very real, and other types of medical conditions can strip patients of their decision making capabilities.
To account for possible incapacity, you should execute a handful of documents. One of them is a living will, which is an advance directive that is used to record your life support preferences.
A health care proxy should be added to empower a representative to make medical decisions on your behalf that are not related to life-support. The plan should include a HIPAA release to give doctors the freedom to discuss your medical condition with your representative.
You would act as the trustee while you are alive and well if you have a living trust, and you can name a disability trustee to assume the role in the event of your incapacity. A durable power of attorney for property can be used to name someone to manage property that is not held by a trust.
We Are Here to Help!
Our doors are open if you are ready to work with a Smithtown, New York estate planning attorney to put a plan in place. You can send us a message to request a consultation appointment, and we can be reached by phone at 631-265-0599.