In our last post, we provided some questions for you to contemplate when you are creating your estate plan outline. In this post, we will provide you with some additional questions to consider as you continue to create your estate plan.
Is taxation going to be a source of concern?
You should consider taxes when you are devising your plan. A direct inheritance is not considered to be taxable income, this includes proceeds from insurance policies.
This is because you would have already paid taxes while you were living. Therefore, your estate consists of the remainder that is left after the taxes have been paid.
However, in some instances, assets that will be transferred have never been taxed.
The beneficiaries of your trust do not pay taxes on distributions of the principal. They do, however, pay income taxes on distributions of the earnings.
Your beneficiaries will have to report distributions from your traditional individual retirement account as taxable income. This is because you funded these accounts with before-tax earnings.
The beneficiaries of your Roth account do not pay taxes on the distributions. This is because you funded these accounts with after-tax earnings.
Inherited appreciated assets get a stepped-up basis. This means that your beneficiaries are not responsible for capital gains that accumulated during your life.
The federal estate tax is currently set at 40 percent. Most people, however, are exempt from the federal estate tax. This is because it only applies to that portion of your estate that exceeds the $11.7 million exclusion. This exclusion has never been higher. Unfortunately, there is a significant reduction looming over the horizon.
The provision in the Tax Cuts and Jobs Act that set the exclusion at this level will expire at the end of 2025. In 2026, it is scheduled to go down to $5.49 million indexed for inflation.
Unfortunately, the reduction could come much sooner. There is a provision in the spending bill that is making its way through Congress that would reduce the exclusion to approximately $6 million.
Does your state have estate taxes?
There are some states that have state-level estate taxes. Oklahoma is not one of them, but if you own property in a state with an estate tax, it would apply to your estate. Of course, it would only be a factor if its value exceeds the exclusion in that state.
The state-level exclusions are lower than the current federal exclusion, so you should do some research if you own property out of state. In Oregon, the exclusion is just $1 million, and this is also the level in Massachusetts.
Are you prepared for incapacity?
According to the Alzheimer’s Association, 32 percent of people that are 85 years old and older have contracted the disease. This is just one of any number of causes of cognitive impairment. Some people will become unable to handle their own affairs due to physical ailments.
You can name a representative to make decisions on your behalf if it becomes necessary with documents called durable powers of attorney. You can use a durable power of attorney for property to empower an agent to make financial decisions for you in the event of your incapacity.
If you have a living trust, you can name a disability trustee to manage the trust if you become incapacitated at some point in time.
You can use a durable power of attorney for health care to address medical decision-making issues. The advance health care directive, and other directives, can be included in your living will. You can use these directives to state your life support preferences in a legally binding matter.
HIPAA regulations prevent doctors from sharing medical information, and this applies to family members. You can give your health care representative the ability to speak freely with your doctors if you include a HIPAA release.
We Are Here to Help!
Our doors are open if you are ready to work with an Oklahoma City estate planning lawyer to put a plan in place. You can call us at 405-843-6100 to schedule a consultation, and you can send us a message through our contact page if you would prefer to reach out electronically.