If you were sitting next to an estate planning lawyer on an airplane and you had a chance to pick the lawyer’s brain, what would you ask? It would definitely be an enlightening conversation, and we will present a hypothetical give-and-take here to pass along some valuable information.
Why is estate planning important?
You would die intestate if you pass away without any estate planning documents. The probate court would step in to sort things out, and the court would appoint a personal representative to act as the administrator.
Final debts would be paid, and the assets would ultimately be distributed in accordance with the intestate succession laws of your state. Under these circumstances, your own true wishes may not be carried out, and this is the most important reason why you should put a plan in place.
Plus, there are different ways to facilitate asset transfers. You can decide the best way for your loved ones to receive their inheritances if you work with an estate planning lawyer to implement a personalized plan.
Is a will the only document you really need?
This is a very commonly held misconception. You definitely need some type of document to facilitate asset transfers, and a will is a possibility.
However, a living trust is a better choice for a wide range of people, and you do not have to be very wealthy to benefit from a living trust.
This would most often be a revocable trust so you could change your mind and take back direct personal possession of the property that you conveyed into it. You would also act as the trustee throughout your life so you would maintain direct control of the assets every step of the way.
In the trust declaration, you name a successor trustee to act as the administrator after your passing, and your heirs would be the beneficiaries. The consolidation of asset ownership can streamline the administration process.
You do not have to provide lump sum inheritances to the beneficiaries all at once when you have a living trust. When you are drawing up the trust, you decide on the way you want the trustee to distribute the assets, and the principal would be protected from the beneficiaries’ creditors.
This is just a quick summary of the benefits, but there are others, and the revocable living trust is not the only alternative to a simple will.
Will my heirs pay taxes on their inheritances?
For the most part, the answer is no. A direct inheritance that received through the terms of a will is not considered taxable income, and this would also apply to life insurance proceeds.
Distributions of the principal in a living trust are not taxable, but distributed interest is subject to taxation. Beneficiaries of Roth individual retirement accounts receive the distributions tax-free, but traditional account beneficiaries have to pay taxes on the income. Annuities are also usually subject to some ordinary income tax.
Appreciated assets that are inherited currently get a stepped-up basis so the inheritor is not responsible for taxes on the appreciation that accumulated during the life of the decedent.
There is a federal estate tax, but the vast the majority of people do not have to worry about it because there is an $11.7 million exclusion. This is the amount that can be transferred tax-free before the estate tax would potentially be levied on the remainder.
It is scheduled to go down to $5.49 million in 2026 when a provision in the Tax Cuts and Jobs Act expires. Proposals currently being considered by Congress would reduce the threshold before 2026. There are 12 states that have state-level estate taxes, but Kentucky and North Carolina are not among them.
Kentucky does have an inheritance tax, which is a tax that can be levied on distributions to each nonexempt inheritor when an estate is being administered. That’s the bad news, but the good news is that a surviving spouse, children, grandchildren, parents, and siblings are exempt.
We Are Here to Help!
If you are ready to have your own conversation with a Charlotte, NC estate planning lawyer, we are here for you. You can schedule a consultation appointment if you give us a call at 704-944-3245 for our Charlotte, North Carolina and Huntersville, North Carolina offices.
The number for our location in Ashland, Kentucky is 606-324-5516, and the number for our location in Florence, Kentucky is 859-372-6655. You can also fill out our contact form if you would rather send us a message.