Read more about the article How to Create an Estate Plan That Works

How to Create an Estate Plan That Works

An estate plan tells your loved ones and the courts how you want to divide your property, as well as protecting heirs from the expenses and stress created when there is no estate plan. An estate plan also saves your family from months, even years, of dealing with courts and government bureaucracies in settling your estate.

How to start? Follow these steps.

Make a complete inventory of your assets, both tangible and intangible. Your Estate is made up of different assets such as real estate, cars, financial accounts, digital assets, life insurance, retirement accounts, pension accounts and personal property. Save your heirs from a scavenger hunt and protect assets from being lost.

Decide who you want to care for your family. If you have children who are underage, name a guardian in your will. The guardian often serves as the conservator, managing the children’s financial assets. Check on your life insurance policies, which provide funds for your family after you’ve passed.

Ask potential personal representatives if they are willing to do the work. The personal representative carries out directions in your will. It can be a big responsibility. They’ll need to gather and manage assets of your estate, notify heirs, Social Security, Medicare, pay estate taxes, secure and possibly sell your home, and more.

Have an experienced estate planning attorney set up at least three key elements: a will, power of attorney, and advance medical directive.

The Will names a guardian and a personal representative (also known as an executor) and gives directions for distributing assets. The biggest estate planning mistake people make is not having a will. When this happens, the court assigns someone to manage your estate, and your family will have to live with whatever the court-appointed person decides.

A Power of Attorney allows someone to care for your business affairs if incapacitated.

An Advance Medical Directive (“AMD”) will enable you to name someone to be involved with your healthcare, speak with your doctors and health insurance company, and help make decisions for you. These documents should be customized to convey your wishes as to how much or how little you want these people to be able to do. An advanced healthcare directive is also used to state your wishes if you are incapacitated about what kind of treatment you do or do not want to receive if you are at the end of your life. This document can be challenging to consider. However, it is a blessing to spare your family from having to guess your wishes during a time of crisis.

Discuss the use of a trust with an estate planning attorney. Trusts are not just for wealthy people. Some trusts take assets from your taxable estate and distribute them directly to beneficiaries outside of probate. Many kinds of trusts serve different purposes, so your estate planning attorney will help you understand which is best for your purposes.

Determine who to leave your assets to and how to structure your estate. If you have young children and you don’t establish the correct trusts, they may inherit everything when they turn 18 or 21. This is rarely a good idea.

Tax planning is a part of estate planning. Your estate may face federal, estate, and/or inheritance taxes. Rates and exemptions are different in every state. This is why it is important to disclose all of your assets and their values to your estate planning attorney.

The incapacity planning part of an estate plan is for you. However, the rest is for your family, to take care of them and show them how much you care about them and their futures.

Contact us today to schedule a complimentary initial consultation with one of our experienced estate planning attorneys. They will walk you through our unique Sims & Campbell firm process and guide you on the next steps in creating your custom estate plan.

Read more about the article Why You Need to File an Estate Tax Return – Annapolis and Towson Estate Planning
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Why You Need to File an Estate Tax Return – Annapolis and Towson Estate Planning

Even if your spouse has died and left all their assets to you and no estate tax is due, you still need to file an estate tax return. Doing so may save your family significant sums in estate taxes after your death, according to a recent article from Forbes, “5 Reasons You Must File An Estate Tax Return (Even When No Tax Is Due).”

The estate tax is a one-time tax due nine months after the date of death. The federal threshold in 2023 is $12,920,000 for an individual. Many states have their own estate taxes, with thresholds ranging from $1 million in Oregon and Massachusetts to $12,920,000 in Connecticut. Your estate planning attorney can advise which assets are included in calculating this amount. For example, many people are surprised to learn that proceeds from their life insurance policies are taxable on their death, unless the policy is owned in an irrevocable trust.

No estate tax is due if your assets are left to your surviving spouse because of the unlimited marital deduction. You get an unlimited deduction for the assets left to your spouse. Spouses can leave any amount to their surviving spouse tax-free, whether $2 or $2 million. However, there are reasons to file an estate tax return. The law requires it, even if the value of your estate assets is below the filing threshold.

If you’ve done estate planning, your spouse most likely has a trust that will break into various sub-trusts upon her death. As the surviving spouse, you’ll need to fund those trusts and apportion assets to them, which is done through the estate tax return. The estate tax return establishes the value of what those trusts are funded with.

Critical tax elections. When you file an estate tax return for your spouse, you’ll make certain elections to determine what assets are included in your estate when you die.

Tax savings for heirs. If your spouse has not used up all their $12,920,000 exemption, you can lock in their unused portion and port it to your estate tax return when you die. The portability of the deceased spouse’s unused exemption could potentially save your children millions of dollars in estate taxes in the future.

The combined exemption for two spouses is currently $25,840,000. The federal estate tax rate can be as high as 40%. By locking in the unused exemption, you could save more than $5 million in estate taxes that would otherwise be due on your death. Even if your assets are not in the $12 million to $25 million range, this is still smart because your assets could increase in value, and the estate tax thresholds are scheduled to drop to $5 million in 2026 (adjusted for inflation).

More tax savings for grandchildren. If your spouse has yet to use all of their general-skipping transfer tax (GST Tax) exemption, you can lock in their remaining GST Tax exemption. The GST Tax is a 40% tax on assets, if you “skip” your children and leave them directly to your grandchildren or in a trust that will eventually be distributed to them. The amount of GST Tax exemption is the same as the estate tax exemption, $12,920,000 per person in 2023. Therefore, the amount is the same, but they are different taxes.

Questions? Contact us to schedule a call with one of our experienced estate planning attorneys.

Reference: Forbes (May 10, 2023) “5 Reasons You Must File An Estate Tax Return (Even When No Tax Is Due)”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Read more about the article What You Need to Know About Estate Taxes – Annapolis & Towson Estate Planning

What You Need to Know About Estate Taxes – Annapolis & Towson Estate Planning

Most Americans don’t have to worry about federal estate and gift taxes. However, if you’re even moderately wealthy and want to transfer wealth to your children and grandchildren, you’ll want to know how to protect your ability to pass wealth to the next generation. A recent article from Woman’s World, “If You’re Rich, Read This—Your Estate Taxes Could Be at Stake (And Your Kids at Risk of Losing Their Inheritance” provides a good overview of estate taxes. If any of these issues are relevant to you, meet with an experienced estate planning attorney to learn how your state’s tax laws may impact your children’s inheritance.

A well-created estate plan can help you achieve your goals and minimize tax liability. There are three types of taxes the IRS levies on gifts and inheritances.

Few families worry about federal estate taxes for now. However, this will change in the future and planning is always wiser. In 2023, the federal estate tax exemption is $12.92 million. Estates valued above this level have a tax rate of 40% on assets. People at this asset level usually have complex estate plans designed to minimize or completely avoid paying these taxes.

An estate not big enough to trigger federal estate taxes may still owe state estate taxes. Twelve states and the District of Columbia impose their own state taxes on residents’ estates, ranging from 0.8 percent to 20 percent, and some have a far lower exemption level than the federal estate tax. Some begin as low as $one million.

Six states impose an inheritance tax ranging between 10 percent and 18 percent. The beneficiary pays the tax, even if you live out of state. Spouses are typically exempt from inheritance taxes, which are often determined by kinship—sons and daughters pay one amount, while grandchildren pay another.

Taxpayers concerned about having estates big enough to trigger estate or inheritance taxes can make gifts during their lifetime to reduce the estate’s tax exposure. In 2023, the federal government allows individuals to make tax-free gifts of up to $17,000 in cash or assets to as many people as they want every year.

A couple with three children could give $17,000 to each of their children, creating a tax-free transfer of $102,000 to the next generation ($17,000 x 3 children x 2 individuals). The couple could repeat these gifts yearly for as long as they wished. Over time, these gifts could substantially reduce the size of their estate before it would be subject to an estate tax. It also gives their heirs a chance to enjoy their inheritance while their parents are living.

It should be noted that gifts over $17,000 in 2023 count against the individual estate tax limit. Therefore, your federal estate tax exemption will decline if you give more than the limit. This is why it’s essential to work with an estate planning attorney who can help you structure these gifts and discuss other estate tax and asset protection strategies.

Questions? Contact us to review your estate plan with one of our experienced estate planning attorneys.

Reference: Woman’s World (April 5, 2023) “If You’re Rich, Read This—Your Estate Taxes Could Be at Stake (And Your Kids at Risk of Losing Their Inheritance”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Can You Gift Money on Your Deathbed? – Annapolis and Towson Estate Planning

A new case out of Tax Court centers on the question of when a “deathbed gift” is considered acceptable for estate and gift tax purposes. The powerful tax law provisions used to help many taxpayers avoid federal estate tax, or reduce it to a manageable size, makes this an important decision, especially as we draw closer to a time when estate tax exemption is likely to return to a far lower number.

The two tax law provisions, described in the article “Tax Court Says When Deathbed Gifts Are Complete” from accounting WEB, are the following:

Annual gift tax exclusion. A taxpayer may give gifts to recipients under the annual gift tax exclusion without incurring any gift taxes. The exclusion, indexed for inflation in $1,000 increments, is $16,000 per recipient in 2022. It’s doubled to $32,000 for joint gifts made by a married couple. Estates can be reduced significantly with planned use of the annual gift tax exclusion. For instance, if a taxpayer and a spouse give the maximum $16,000 to five relatives for five years in a row, they will have transferred $800,000 ($32,000 x 5 x 5) out of their estate, free of taxes.

Unified estate and gift tax exemption. In addition to the annual gift exemption, gifts may be sheltered from tax by the unified estate and gift tax exemption. As of this writing, the exemption is $10 million, indexed for inflation, which brings it to $12.06 million in 2022. It is scheduled to drop to $5 million, plus inflation indexing, in 2026.

Using the exemption during the taxpayer’s lifetime reduces the available estate shelter upon death. These two provisions give even very wealthy taxpayers a great deal of flexibility regarding liquid assets.

The new case came about as a result of a resident of Pennsylvania, who executed a Power of Attorney (POA) in 2007, appointing his son as his agent. The son was authorized to give gifts in amounts not exceeding the annual gift tax exclusion. From 2007 to 2014, the son arranged annual gifts to his siblings and other family members, in accordance with the POA.

The father’s health began to fail in 2015 and he passed away on September 11. On September 6, five days before he died, the son wrote eleven checks, totaling $464,000 from the father’s investment account.

Some recipients deposited the checks before the decedent’s death, but others did not. Only one check was paid by the investment account before the decedent’s death.

The question before the Tax Court: are the gifts complete and removed from the decedent’s estate?

According to the IRS, any checks deposited before death should be excluded from the taxable estate, but the Tax Court looked to the state’s law to determine the outcome of the other checks. The Tax Court ruled the checks not deposited in time must be included in the decedent’s taxable estate.

The estate planning lesson to be learned? Timing matters. If checks are written as part of the plan to minimize taxes, they must be deposited promptly to ensure they will be considered as gifts and reduce the taxable estate.

Reference: accounting WEB (Aug. 26,2022) “Tax Court Says When Deathbed Gifts Are Complete”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys