With this in mind, we will share a hypothetical conversation between a client and an estate planning attorney here. It will provide an instructive general overview, so you can absorb some very useful information that is delivered in a concise manner.
What would happen if I die without any estate planning documents?
This would result in the condition of intestacy, and the Surrogate’s Court would supervise the estate administration process under these circumstances. In many instances, this is a very messy and complicated process, and deserving family members are often unintentionally disinherited.
If I’m not extremely wealthy, I just use a will, right?
The answer to this is a resounding no, but you are not alone if you harbor this misconception. Actually, if you expect to leave behind any type of reasonably significant legacy, a last will would not be the best choice for a number of different reasons.
What’s wrong with a will?
In large part, the answer goes back to the matter of probate. If you were to create a will, you would name an executor to act as the estate administrator. Your executor would admit the will to probate after you are gone, and the court would provide supervision.
This process is costly and time-consuming, and it strips your family of privacy, because anyone that wants to pry into your final affairs can access public probate records. The probate drawbacks are a big part of the problem, and there are severe limitations when you use a last will.
What is the alternative?
There are many different asset transfer vehicles, but for most individuals, the ideal alternative to a last will would be a revocable living trust. All of the probate pitfalls are avoided completely, because assets that have been conveyed into a living trust can be distributed to the inheritors outside of probate.
Aside from this, there are other benefits. You lose no control, because you can act as the trustee and the beneficiary while you are living. There is absolute flexibility; you can change the terms and add or remove property from the trust at any time. And of course, it is revocable, so you can dissolve the trust entirely if you ever choose to do so.
All of the assets will be consolidated in one place, and this streamlines the estate administration process. You also have the ability to include important protections for the persons who will inherit your estate when you die.
Will my estate be subject to taxation when the assets are being transferred?
For most people, the answer is no. Inheritances are not looked upon as taxable income by the IRS, and if someone inherits appreciated property, they get a step up in basis. This means that they would not be responsible for the capital gains that took place during the life of the decedent. If they realize gains in the future, capital gains taxes would be a factor.
High net worth individuals do have to be concerned about taxation. We have a federal estate tax in the United States, and it carries a whopping 40 percent maximum rate. That’s the bad news, but the good news is that there is an $11.58 million exclusion. This is the amount that can be transferred before the estate tax would be applied.
Here in New York, we have a state level estate tax as well, with an exclusion of just $5.85 million.
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