Studies that are conducted on a periodic basis consistently find that the majority of Americans are unprepared from an estate planning perspective. In many instances, the inaction is caused by misconceptions. A lot of folks think that you can simply draw up a last will when you are old and gray, and the matter is closed.
In fact, there are multiple facets to take into consideration. In this blog post, we will use a hypothetical question and answer session to provide some solid foundational information about the estate planning process.
A last will is the right document for transferring assets for most people, right?
This is one of the most commonly held misconceptions about the process of estate planning. If you have a legacy of some substance to pass along to your loved ones, you should understand the fact that there are drawbacks and limitations if you choose to utilize a last will.
When a will is the asset transfer vehicle, it must be admitted to probate by the executor after the death of the testator. This process can take up to a year if the situation is not very complicated, and no inheritances can be distributed until the estate has been closed by the court.
There are a lot of expenses that accumulate during probate. The court charges a filing fee, and the executor will often bring in an attorney and an accountant, and these professionals must be paid. An executor is entitled to compensation, and there can be appraisal and liquidation fees. Money that is spent during probate is essentially coming out of the pockets of the rightful inheritors.
Another probate feature that many people are not particularly fond of is the fact that probate records can be obtained by the general public. Anyone that is interested can find out exactly how you decided to transfer your assets if you use a will.
What is the viable alternative to a last will to avoid these negatives?
The optimal choice will depend upon the circumstances, but generally speaking, a revocable living trust is an estate planning tool that provides a host of benefits. First and foremost, when a living trust has been established, assets can be distributed outside of probate.
If you were to create a living trust, you would be able to act as the trustee and the beneficiary, so you would retain full control of the assets throughout your life. When you draw up the trust declaration, you would name a successor trustee and successor beneficiaries to assume these roles after your passing.
In addition to the avoidance of probate, if you have a living trust, you can include spendthrift protections. It would be possible to instruct the trustee to distribute limited assets to the beneficiaries over an extended period of time. You can also account for the possibility of your own incapacity late in your life by naming a disability trustee that would be empowered to step in if you become unable to handle your own affairs.
Will my estate be subject to taxation?
Many people are pleasantly surprised when they learn that, generally speaking, inheritances are not subject to regular income taxes. Plus, if you inherit appreciated assets, you get a step up in basis. This means that you would not have to pay capital gains taxes on the gains that accumulated during the life of the person the left you the inheritance.
All of the above is the good news, but the bad news is that some estates are exposed to estate taxes. There is a federal estate tax that is applicable on asset transfers that exceed $11.4 million. The maximum rate of the tax is 40 percent.
There are a lot of great things about living in New York where we practice law, but there is a tax drawback. Our state has a state-level estate tax, and the exclusion is much lower than the federal exclusion at $5.74 million. And if the value of your estate exceeds this figure by more than five percent, the entirety of the estate would be subject to the New York death tax.
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If you would like to discuss your estate planning goals with a licensed attorney, we are here to help. You can send us a message through our contact page to request an appointment, and we can be reached by phone at 585-374-5210.