On occasion, you may have asked yourself, “do I really need an estate plan”? I can tell you without a doubt that you do. Regardless of the size of your estate, if you have an asset, a child, a dependent, or a pulse, you need an estate plan.
What is an estate anyway, you ask? An estate is essentially an accumulation of everything you own at your death. An estate PLAN is a plan you put into place to address what will happen when you pass away or if you become incapacitated.
Estate planning ensures the proper disposition of your assets upon your death, protects your loved ones, prepares for your care in the event of incapacity, protects your assets from future creditors, and reduces the tax burden on your estate.
Why is an estate plan necessary if I have a modest estate or no assets? An estate plan will help you ensure that you have control over where your assets go when you die. Perhaps you want to leave some assets to a charity or an alumni association, or you have specific instructions for a business interest, or you want to make sure certain persons do not inherit anything from you. Even if you do not have any assets, what will happen if you get really sick – who will take care of your financial affairs? Who will make healthcare decision for you if you are not in a position to do so? How will you pay your bills if you cannot work due to illness? A comprehensive estate plan addresses all of these issues.
Why is an estate plan necessary if I have minor children or dependents? If you have minor children or dependents, you will want to have a plan in place that identifies and enables someone to take care of them if you pass away or are incapacitated. You may also want to protect family members who have special needs from being disqualified from government benefits. You may also want to appoint someone to manage assets for the benefit of your children or dependents until they are ready to manage the assets on their own. An estate plan will allow you to account for these types of situations.
Why is an estate plan necessary if I have a large or complex estate? The first thing that comes to mind is potential tax liability from income coming into the estate, or transfer tax liability that you will want to minimize. Other considerations could be protecting your legacy from divorce, your own, or your child’s should they inherit something from you. Avoiding probate to reduce administrative fees and delay in the transfer of your assets is another consideration.
Transfer Taxes. Transferring your wealth to another person or entity is considered a privilege and is a taxable event. In Virginia, there are currently no transfer taxes or inheritance tax (tax that is paid by the recipients of an inheritance) assessed by the state. The federal government does not assess an inheritance tax either, however, there are three types of federal transfer taxes currently in effect: the estate tax, gift tax, and generation skipping transfer tax (“GST”).
Estate Tax. The estate tax is a tax that is assessed on your estate for assets that are transferred at your death. The estate includes everything that you own or have control over at the time of your death AND some things that you do not own but retain some right to (e.g. powers of appointment, life insurance policies within three years of death, jointly held property, revocable transfers). The estate is responsible for paying the tax due.
Gift Tax. The gift tax is a tax that is assessed on you for assets that are transferred during your lifetime. The purpose of this tax is to tax items that would have been in your estate at death but for the gift. You are responsible for paying the tax as the donor.
Generation Skipping Transfer Tax (“GST tax”). The GST tax is assessed when a transfer skips a generation of estate taxation. By way of example, consider this scenario. If you make a gift or leave property to your child, you potentially pay taxes for that transfer. Then, when your child dies, he leaves his property to his child and again will potentially pay taxes for that transfer. However, if instead, you make a gift or leave property directly to your grandchild, the government misses out on the taxes that would have been paid by your child had you gifted or left the property to him first.
The current tax rate for all three range from 18% to 40% depending on the amount that is to be taxed. The good news is that for the estate and gift taxes, you can transfer an exempted amount tax free at death. The 2023 lifetime exemption is 12.92 million (25.84 for couples). In addition, each year that you are alive, you can gift an amount equal to the annual gift exclusion to as many people as you want, and it will not count toward your exemption limit. The 2023 annual exclusion is $17,000. The GST tax has a separate exemption that is also currently 12.92 million.
Your estate planning attorney should assess your goals to determine which tools will be the most advantageous in your estate plan. As you have probably already gleaned from the information above, not everyone needs the same plan. You may only need a Will, or just a Healthcare Power of Attorney, or you may need multiple Trusts or adjustments to your operating agreements to accomplish your objectives. Your comprehensive estate plan should allow you to transfer assets as you desire with a minimal financial and administrative burden to your beneficiaries. In addition, your estate plan should reflect your wishes for medical treatment or life support, organ donation, burial, care for your pet(s), and appoint an attorney-in-fact in the event of incapacity or unavailability.