Creating an estate plan is the right step to take to help protect your assets and ensure proper transfer to your heirs upon your death. No one really enjoys discussing their own mortality but it is a very important step to take.
Many people try to create their own estate planning documents by writing their own wills and trusts on a website that offers them templates for a fee. The problem with taking these routes is that you do not get the benefit of speaking with and being guided by an estate planning and asset protection attorney. Instead, you literally take these matters into your own hands.
We find that people often avoid using the services of a skilled estate planning attorney because they think it will be too expensive. It would surprise you to find that, in the end, using the right estate planning and asset protection lawyer will save you money by helping you avoid these common issues.
Exceeding the Estate Tax Exemption
Estate taxes are a hot political issue so you may have heard this debate before. They are paid on high-value estates when the person dies. An estate tax exemption applies to any estate that falls below a certain total value and means the estate pays no tax. Historically, this has been a relatively low number which has not increased as wealth increases.
On December 22, 2017, the Tax Cuts and Jobs Act became law. This Act raised the estate tax exemption from about $5.5 million to about $11.2 million. This was a huge increase allowing many more estates to avoid tax liability. Further, the Act also provided that each year the government will adjust the estate tax exemption amount for inflation. In 2020, the exemption amount is $11.58 million.
But here’s the catch, and it’s a big one — the Act provided for an estate tax exemption expiration date. After 2025, this higher exemption amount and the annual inflation adjustments end and we revert back to the $5 million exemption amount. While it is entirely possible that Congress will extend the benefits under the Act beyond 2025, we have to plan as though they will not. This means you must plan for your estate to be taxed on values above $5 million.
You might think that number is way beyond anything your estate will reach. But think of the value of your current property. Your house. Your car or cars. Your total investments. These items add up quickly and the best way to ensure you stay below the taxable estate amount is to work with a trusted estate planning attorney who can help you plan for and transfer assets outside of your estate. There are many tricks in this book and we know which ones to use for your specific situation to help you maximize your asset protection and minimize the amount of tax you or your heirs pay.
Creating Tax Liability With a Gift Transfer
Gifts are a fantastic way to transfer wealth. When you gift money to other people now, you can take advantage of the current higher estate tax exemption level. In 2020, you can gift up to $15,000 per year to each person you want to give money to, tax-free. Giving this money or asset now to your beneficiaries allows you the ability to give more if the estate tax exemption reverts back to pre-2017 levels. This is true even if the government reinstates the lower exemption levels.
However, pay attention to the gift if it is not cash. If you give an asset to an individual and they later sell that asset, they may be subject to income tax on any gains realized from that gift. This could result in a tax liability for your beneficiary which could be avoided with proper estate planning guidance from an experienced asset protection attorney.
Improperly Funding a Trust
Trusts are a great tool used to shield your wealth from taxation. The point of a trust is to make you, an individual, die with as little money and asset wealth as possible in your individual name.
When a trust is established, many people fear this means they lose control over their money. That is not the case at all. Depending on the type of trust set up for you, your daily control and use of your money and assets, for all practical purposes, does not change.
But to make a trust valid after it is drafted, it must be funded. This means, the trust must own something. That thing can be your house, car, investment accounts, or all of these. The more the trust owns, the less you, an individual own. The goal here is to shield your wealth from taxes for your beneficiaries by making your wealth part of the trust, which is not subject to taxes, if prepared correctly. When you transfer assets to your trust, you remove these assets from your estate, reducing your tax liability.
Simple wills do not provide this level of asset protection. But if a trust is not properly funded when drafted, it will not be valid and the assets will still live in your name and therefore be subject to taxes. To avoid this costly scenario, work with a trusted estate planning lawyer who can help you set up your estate plan with maximum asset protection for both you and your beneficiaries.
Take Action Today
The goal of estate planning is asset protection for both you and your beneficiaries. But when you do not work with experienced advisors, you risk losing substantial amounts to estate taxes and even income tax for your heirs.
The worst type of estate plan is to have no estate plan at all. Thinking that estate planning is only for the super rich could be a costly mistake. Taking action now ensure you reap the benefits of the current high estate tax exemption while preserving and protecting your assets for you and your loved ones. Even if you already have an estate plan, it’s wise to review your plan annually to ensure you are taking full advantage of existing tax law.
By working with us, you get access to our collective skills and knowledge to make certain that you and your beneficiaries are protected. Contact us today to learn how we can best help you.