Have you ever considered who will inherit your assets or what might happen to your property when you’re gone? It’s a sensitive issue but a concern that should be paid attention to at several moments throughout life. A proper estate plan is essential to ensure that the wishes you have placed at your departure are respected and that your loved ones, who, once you are gone, will remain to care for themselves, will continue to be cared for as well.
So, when should you start thinking about estate planning? The sooner you can identify the critical moments in your life, the better the timing will be for your estate planning needs.
What is Estate Planning?
Essentially, estate planning refers to the preparation for managing and settling a person’s financial affairs in the case of his or her death or incapacitation. It involves preparing matters such as the distribution of assets to beneficiaries, the payment of estate taxes and debts, setting up legal guardians for children younger than 18 years old, and others. An attorney experienced in estate law is often included to assist in the preparation of estate planning. Making a list of possessions and obligations, checking financial statements, and drafting a will are all part of the process.
Your Estate Planning and Tax
Federal and state taxes may eat away at your wealth in a big way. Your successors’ ability to enjoy the fruits of your labor depends on several factors, including various forms of taxation. Keep in mind the following kinds of taxation.
Estate Tax
When someone dies, their assets are subject to the federal estate tax. The worth of your estate’s assets will decide how much tax you owe. After subtracting any tax-deductible expenses, losses, or exclusions, a decedent’s assets are considered part of their taxable estate.
An exemption is available for estate tax, depending on the valuation of the estate. The exemption level is regularly revised to reflect tax legislation and inflation changes.
You will not be required to pay federal estate tax unless your estate is worth more than a certain amount. It depends upon your residence as to whether or not you are liable to pay state-level estate tax. The exemption levels that states may establish for estate taxes dictate when the tax is applicable.
Gift Tax
A financial gift from you to another person is subject to the gift tax. The onus for the payment of the gift tax is on you, the donor. However, there is an annual exclusion limit that the IRS allows for gifts before the gift tax kicks in.
You might avoid paying gift tax by distributing the whole value of your estate to as many people as you want. By mutually agreeing to divide presents on the tax return (gift splitting), married couples may increase the gift tax exclusion limit by two times.
Inheritance Tax
The assets of a person who passes away are subject to a state tax known as an inheritance tax. You should be aware of the potential implications for your estate plan of the existence of an inheritance tax in your state, even if this is not the case in every state.
At death, your assets are used to pay the estate tax, and the rest goes to your heirs. However, the person or people who receive your estate’s assets are subject to inheritance tax. In most cases, the monetary worth of the assets obtained will dictate the tax rate.
Generation-Skipping Tax
If you “skip” a generation in your estate plan, you may also be required to pay the Generation-Skipping Tax, another federal tax. For example, let’s pretend that you leave assets to your children’s children rather than your adult children. If the generation-skipping tax applies, you must pay the highest federal estate tax rate. Remember, generation-skipping tax is separate and has its own rates and exemptions, distinct from estate tax rates.
You can forget about that problem altogether by setting up a generation-skipping trust. Creating this trust may minimize your estate tax burden while passing assets to future generations.
When to Start Estate and Tax Planning
Estate and tax planning relies heavily on timing. Although there are many turning points or factors that could remind you to start planning, here are some of the most critical moments:
Major Life Events
- Marriage or divorce: Changes in your marital status will strongly impact any estate plan you may have today and future estates. Change with the times by amending your documents appropriately.
- Childbirth or adoption: In most cases, the birth or the adoption of a child makes a couple understand that they need to be more concerned with the guardianship and the fiscal security of their child.
- Death of a family member: The death of a family member might require the review of your estate plan if you have inherited rights or responsibilities.
Major Financial Life Changes
- New job or business: Things can suddenly become quite different once you change income or start a business; new planning techniques are necessary.
- Inheritance or windfall: A sudden influx of cash can muddle your situation and make estate planning all the more crucial.
Retirement Planning
- Near retirement age: You are reaching retirement age, so planning how the assets will be managed and distributed is paramount. This being so, consider the tax implications and adjust your estate plan accordingly.
Health Considerations
- Chronically ill or in poor health: You or someone you care for who is chronically ill or in failing health is a great time to discuss those wishes you may have regarding medical treatment and end-of-life decisions.
Size and Complexity of the Estate
- Exceeding threshold exemption limits: In such a case, when your estate is likely to exceed the federal estate tax exemption threshold, there’s a great need for tax planning on a forward-looking basis to minimize liabilities for your heirs.
Periodic Checks
- Regular check-ups: No major life events are required, but it would be wise to review your estate plan every couple of years after significant changes in the tax law to ensure that it aligns with your current wishes and the law.
At Any Age
- Start early: It’s never too early to prepare a will and trust. Mature young adults who have realized an appreciation of wealth should start with a basic plan incorporating simple last wills and original powers of attorney.
When Do You Need An Attorney?
Making arrangements for the safekeeping, administration, and distribution of your assets in the event of your death or incapacitation is an integral part of estate planning. Asset bequests to various heirs or beneficiaries are another component of estate planning, as is the appointment of a guardian for any young children or pets.
Your state’s inheritance tax settlement instructions (if applicable) and federal estate tax settlement instructions should be part of your estate plan. Also, your executor has to be aware of your financial obligations and how to settle them. An attorney specializing in estate planning can shed light on the maze of paperwork and ensure you meet all of your state’s regulations. You can do part of this independently, but hiring an estate planning attorney can strengthen your strategy at critical junctures. The assistance of an estate planning attorney is highly recommended for anybody dealing with a large or complicated estate.
How Mucci Law Can Help
Estate and tax planning lays the groundwork for securing one’s future financial position and helps guarantee the realization of wishes. With our experienced team of attorneys, you will receive the best personalized advice based on your needs to help you master estate law and taxation. For first-time estate plans or updating an existing plan, our support is there as much as you need it. Let us help you achieve peace of mind through comprehensive planning strategies. Contact Mucci Law today and start on the right path toward a secure financial future!
FAQs
When do I need to start planning my estate and taxes?
You want to start estate and tax planning early, ideally on acquiring considerable assets or significant life events, like getting married, conceiving children, or retirement. It helps document your wishes in detail and for the apparent reason of avoiding or reducing tax liabilities.
What can an attorney do to assist in estate and tax planning?
An attorney will take you a step forward in detailing estate laws and tax regulations, assist in formulating plans that suit your needs, ensure all the documents are correctly executed, and help you reduce your tax liabilities by ensuring that your assets are eventually protected for your loved ones.
Can I revise my estate plan?
Yes. Changes in life circumstances necessitate changes in your estate plan. Events such as marriage, divorce, the birth of a child, and others that affect your finances considerably will require changes to keep the express nature of your wishes proper and current.
Abhishek Shah
