Surveys find that most people that do not have estate plans in place recognize the fact that it is important. A lot of them are frozen with inaction because they do not know where to begin, and this is understandable when you are stepping into unknown territory.
This in mind, we are going to look at three simple steps that you can take that will lead to the creation of an effective estate plan.
Calculate Your Net Worth
The first step is to inventory all of your assets so you know what you have to pass along to your loved ones. When you are doing this, you should tally up your net worth at the present time, and you can make projections for the future.
Generally speaking, inheritances are not considered to be taxable income by the IRS. However, people that have accumulated a very significant store of resources may face federal estate tax exposure.
There is an exclusion that can be used to transfer a certain amount tax-free, and the remainder would potentially be subject to taxation. In 2021, the federal estate tax exclusion stands at $11.7 million.
This figure will be in place adjusted for inflation through 2025, but in 2026, it will go down to $5.49 million when a provision in the Tax Cuts and Jobs Act expires. Plus, the For the 99.5 Percent Act that is on the table in Congress would reduce it to $3.5 million.
We do not have a state-level estate tax in California, but there are a dozen states that have this type of tax. If you own valuable property in a state with an estate tax, the tax would apply to your estate if its value exceeds the exclusion in that state.
There is an estate tax in neighboring Oregon with a $1 million exclusion, and there is an estate tax in Hawaii with a $5.49 million exclusion.
If your estate is going to be exposed to a federal and/or state-level estate tax, there are steps that you can take to mitigate the damage.
Assess Your Intentions and Your Family Dynamic
Once you have completed the first step, you have to sit back and determine how you want to craft your legacy. If you have specific goals, you can work toward them when you are planning your estate.
For example, if you want to be able to provide college educations for your grandchildren, you may want to contribute assets into custodial accounts.
You should also consider the life situation of the people that will be receiving inheritances from you. There are different asset transfer methods that can be utilized, and the best way to get resources into the hands of one person may not be appropriate for the next.
Providing for a loved one with a disability is a case in point. Many people with special needs rely on Medicaid as a source of health insurance, and they receive income through the Supplemental Security Income (SSI) program.
These are need-based benefits, so an improvement in financial status can cause loss of eligibility. You would not want to leave a direct inheritance to someone that is in this position, but there is a solution in the form of a supplemental needs trust.
If you have someone on your inheritance list that is not good with money, you can include asset protection and spending safeguards if you create a living trust with a spendthrift provision.
There is also the incentive trust which can be used to guide a loved one toward certain actions, and this type of trust can be used to incentivize a beneficiary to avoid self-destructive behavior.
Consult With an Estate Planning Attorney
Once you have established an outline by going through the first two steps, it is time to work with a Los Angeles estate planning attorney to actualize the plan.
We can gain ab understanding of your vision and help you establish a custom crafted plan that will maximize your legacy and provide for each inheritor in the optimal manner.
When you are ready to schedule a consultation, we can be reached by phone at 310-337-7696, and there is a contact form on this site you can use if you would like to send us a message.
Cesar has received his Masters of Science in Integrated Design, Business and Technology from the University of Southern California.
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