Read more about the article Why It’s Important to Update Your Estate Plan – Annapolis and Towson Estate Planning

Why It’s Important to Update Your Estate Plan – Annapolis and Towson Estate Planning

When someone dies without having updated their estate plan for many years, the executors often face a difficult task of administering a disorganized and incomplete estate. At best, the executor needs additional time and resources to organize the estate. At worst, says a recent article titled “Estate plans require maintenance” from The Record-Courier, the decedent’s wishes and desired distributions are not followed.

Among several reasons for updating an estate plan are major life events, known as “trigger” events. These include marriage, birth, death, divorce or changed financial circumstances.

The same is true for the death of a beneficiary or changed personal relationships.

If the grantor becomes incapacitated, changes in the estate plan may become necessary if the person needs long-term care or will be receiving any kind of means-tested government benefits.

A revision of the estate plan is warranted if there is a change in one’s assets, from purchasing a new home or business, selling real property or the modification of a business venture. A growing estate may require a revised plan focused on minimizing estate tax liabilities. On the other hand, if the size of the estate has decreased significantly, an estate plan focused on tax planning may need to be revised or simplified.

Most businesses require a succession plan and the designation of a person to take control of the business upon the death of the grantor.

Finally, as assets within the estate change, the property list, often referred to as the “schedule,” should be updated. All newly acquired assets need to be titled properly, especially if the plan is for them to be owned by a trust.

Each state has different estate laws, so a move to a different state definitely requires an estate plan to be revised, as some elements of the estate plan may become invalid. For example, in some states two witnesses are required to execute a last will, while in others one witness is sufficient. If you move from a one-witness state to a two-witness state, the possibility exists for your last will to be deemed invalid.

Any changes to the estate plan desired by the grantors, such as changed distribution of assets on death or a wish to name a different person to inherit, requires a revision.

Changes in the law, especially those regarding estate taxes, also make it necessary to update an estate plan. The general recommendation is to review the estate plan every three to five years, regardless of whether any trigger events have occurred.

Establishing a comprehensive estate plan, which includes a last will, health and financial powers of attorney and any necessary trusts, and maintaining it is the best way to ensure your wishes will be carried out in case of incapacity and death.

Contact us to review your estate plan with one of our experienced estate planning attorneys.

Reference: The Record-Courier (Jan. 28, 2023) “Estate plans require maintenance”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Read more about the article Top Benefits of Estate Planning – Annapolis and Towson Estate Planning

Top Benefits of Estate Planning – Annapolis and Towson Estate Planning

Despite the hard lessons learned during the COVID pandemic, surveys repeatedly show most Americans still don’t have an estate plan in place. According to the article “Five benefits of estate planning” from The Aspen Times, a comprehensive estate plan ensures your assets are distributed according to your wishes when you die, minimizes taxes on your estate and protects your loved ones, especially those who depend on you financially. In addition, estate planning protects you while you are living and ensures that your wishes are followed, if you become incapacitated.

Protect Yourself and Your Assets During Your Lifetime. No one likes to consider themselves at risk of incapacity. However, this happens. If you become mentally or physically incapacitated during your lifetime, you might not be able to earn income, or make decisions for yourself. Part of an estate plan includes documents to address these risks to protect yourself, your family and your assets.

Designating a health care proxy and a power of attorney gives people you choose the ability to make decisions on your behalf. Otherwise, the responsibility for your medical, legal and financial decisions may go to someone you don’t even know.

Asset Distribution. Without a last will, your home state’s laws govern the distribution of your assets. Your intentions to care for certain individuals won’t be relevant, as the law itself decides who gets what. A last will is used to state exactly how you want assets to be distributed. Your last will should be updated as your financial situation and/or family dynamics change. You should also review designated beneficiaries on investment accounts and insurance policies regularly and especially after any major life changes.

Minimize Transfer Taxes. While there’s no way to predict what taxes will take effect in the future, it’s safe to assume there will be taxes on your estate. If you hope to leave wealth of any size to your family, proper estate planning is crucial. There are many different strategies to minimize taxes on inherited wealth, including life insurance, Roth IRA conversions, lifetime giving and trusts. Your estate planning attorney will be able to create a plan suited for your unique situation.

Protect Family Wealth. As people accumulate wealth, they often become the targets of frivolous lawsuits. For this reason, placing assets in certain types of trusts can ensure efficient wealth transfer, as well as protecting assets from predators and creditors.

Create and Continue a Legacy. Legacy planning is part of the estate planning process. Many people donate money or assets on their death to causes they supported during their lifetime. These goals can be achieved by contributing to a donor advised fund, creating a family foundation or setting up a philanthropic trust.

Creating an estate plan is also a useful tool for having candid discussions with the family about the future, avoiding future conflicts and making your estate administration easier for loved ones.

Contact us to review your estate plan with one of our experienced estate planning attorneys.

Reference: The Aspen Times (Jan. 24, 2023) “Five benefits of estate planning”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Read more about the article Does Estate Plan Need a Trust? Annapolis and Towson Estate Planning

Does Estate Plan Need a Trust? Annapolis and Towson Estate Planning

Many people dismiss trusts as only needed by wealthy people. However, they actually can be used to solve many different issues. A recent article from The Mercury titled “Planning Ahead: How do you know when you need a trust?” examines the different reasons for using trusts.

Family Members with Special Needs. If your family includes a family member with special needs, you’ll want to use a Special Needs or Third-Party Supplemental Needs Trust to protect the individual’s eligibility to receive government benefits. Most benefits are means-tested, so a disabled person is not permitted to have more than a minimal level of assets. A well-intentioned family member may feel they are doing a good thing by bequeathing assets to an individual with special needs. However, they would instead be putting the person’s benefits at risk.

Special Needs planning is complex, since it usually involves several different benefit programs as well as services. An estate planning elder law attorney is often involved in helping families navigate benefits and planning for the future, when parents are deceased.

When money management is needed. The average person isn’t accustomed to managing million-dollar portfolios. Therefore, when a large inheritance is in the future, a trust with an experienced financial manager as a trustee can be a better alternative. This is good ‘future-proofing.’ For an example, a woman with a large estate dies unexpectedly, leaving adult children with an equally unexpected large inheritance. The children are suddenly tasked with managing complex investment vehicles and tax liabilities. Had the estate been in a trust with a skilled money manager, their interests would have been better protected.

Real estate in multiple states. Real estate in more than one state gets complicated for estate management. It might be easier to place all of the assets in one trust to make management easier.  If the goal is to keep the property in the family, like a vacation home, a trust is an easier way to own the property and define the rights and responsibilities of the beneficiaries.

Do you need tax protection? Placing assets in trusts can remove them from the taxable estate. Tax planning is a common reason to use trusts, and many different types of trust are available for this purpose.

Do you want a trust to manage funds during your life and after you’ve passed? A revocable living trust can be used to hold your assets during life and postmortem. A revocable trust does not remove assets from the taxable estate but are used for other purposes. This type of trust is usually used in conjunction with a “pour-over will,” where assets held in your name at the time of death are “poured over” into a living trust.

Your estate planning attorney will be able to determine which of the many different types of trusts will be right for you and your family’s unique circumstances.

Contact us to review your estate plan with one of our experienced estate planning attorneys.

Reference: The Mercury (Nov. 23, 2022) “Planning Ahead: How do you know when you need a trust?”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Read more about the article Do I Need a Last Will and Testament? Annapolis and Towson Estate Planning

Do I Need a Last Will and Testament? Annapolis and Towson Estate Planning

Estate planning encompasses everything from planning for property distribution at death to preparing for incapacity, tax planning and guardian planning for minor children. An experienced estate planning attorney is involved with far more than a last will and testament. However, this is what most people think of when they sit down for their first meeting.

A recent article titled “Last Will and Testament” from mondaq examines what the last will and testament does and how it differs from trusts. These two are only part of a comprehensive estate plan.

A will is only effective upon death.  Its directions are not followed while living or if a person becomes incapacitated. A will does not avoid probate, rather it ensures assets go to the people as directed by the person making the will. Without a will, assets are distributed according to the laws of the state, usually determined by kinship. A certain percentage will go to a spouse and another percentage will go to biological children. Unmarried partners and stepchildren have no legal right of inheritance.

The will is also the legal document used to name an executor, the person responsible for carrying out the directions in the will and managing the estate. The executor has a long list of duties, from making sure the will is validated by the court during probate to applying for an estate tax identification number with the IRS, opening an estate bank account, notifying Social Security of the decedent’s passing, paying debts, paying taxes for the individual and for the estate and distributing property,

The will is used to name a guardian for minor children. When planning has been done correctly, the guardian is provided with information about the children’s lives and financial planning has been done for the children’s support and for their education. A trust is usually used to hold assets for the benefit of the children, with a trustee named to manage funds.

Wills go through probate, which varies by state. Once the will is filed in court, it becomes a public document. Heirs must be notified, even those not included in the will. An alternative is creating and placing assets in a trust to protect privacy and manage and distribute property.

Trusts are not just for wealthy people. They are used to maintain privacy, as the assets in the trust do not pass through probate. The trustee is in charge of the trust and making distributions to beneficiaries. There are many different types of trusts; an experienced estate planning attorney will be able to recommend the optimal one for each client based on their situation.

The trust is effective upon its creation and is a separate legal entity and is also used to protect assets from creditors. Trusts are more complicated than traditional bank accounts. However, their ability to protect assets and maintain privacy make them a valuable part of any estate plan.

If a person becomes incapacitated, the trust remains in effect. If the trust is a revocable trust, meaning the grantor is able to change its terms as long as they are living and the grantor becomes incapacitated, a successor trustee can step in and manage the trust without court intervention.

Trusts do require diligence to create. Trust must be funded, meaning assets need to be retitled so they are owned by the trust. New accounts may need to be open, if retitling is not possible. Beneficiaries need to be established and terms need to be set. The trust can be created to fund a college education or for general use. However, terms need to be established.

A comprehensive estate plan protects the individual while they are living and protects the family after they have passed. It is a gift to those you love.

Contact us to review your estate plan with one of our experienced estate planning attorneys.

Reference: mondaq (Nov. 16, 2022) “Last Will and Testament”

 

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Read more about the article Why Everyone Needs an Estate Plan – Annapolis and Towson Estate Planning

Why Everyone Needs an Estate Plan – Annapolis and Towson Estate Planning

 Estate planning means making plans to manage and distribute assets and caring for loved ones in the event of a person’s death or incapacity.  It also involves the creation of legally binding documents to outline a person’s wishes for health care and financial matters. Estate planning ensures your wishes are carried out and is also used as a means to minimizes taxes, as explained in the article “Why Estate Planning Is Important Even If You Don’t Have Assets” from The LA Progressive. 

Even if you don’t have significant assets, you still need to make decisions about your health care, which is done as part of an estate plan. Here are the fundamentals to get you started.

Will. This is a legal document with specific instructions regarding how your assets are to be distributed after death and who should be named as a guardian to care for minor children. The will is also used to name a person to serve as executor of your estate to carry out your wishes and manage distribution of assets.

Trust. A trust is a legal entity holding property or other assets on behalf of another person, known as the beneficiary. There are many different types of trusts, including revocable, irrevocable and charitable trusts.

The revocable trust allows you to maintain control over assets in the trust during your lifetime. After death, the assets in the trust are distributed according to the terms in the trust. An irrevocable trust can’t be changed or amended once it’s established. Charitable trusts are used to provide for a nonprofit organization.

Trusts are used to manage and distribute assets during a person’s lifetime and after their death. They are also used to remove assets from the taxable estate and can also be used to manage expenses associated with the distribution of one’s estate.

Healthcare Power of Attorney. This document allows you to name someone to make medical decisions on your behalf if you are incapacitated and can’t make decisions for yourself. These should be created with your personal situation in mind; a standard form may not permit the nuances you want to convey to another person. With a customized healthcare POA, you can specify the type of decisions your healthcare agent may make and describe any limitations you want over their authority.

Financial Power of Attorney. The financial POA allows you to name a person, called your “agent” or “attorney in fact,” to manage finances if you are too sick or injured to do so. This should also be a customized document, as you may want to limit your agent’s authority to pay bills or allow them to do everything from paying bills to managing investment accounts. The POA expires upon your death and the agent can’t perform any tasks once you have passed away.

Without an estate plan, the care of minor children and distribution of assets takes place according to state laws, which isn’t how most people want their decisions made. The solution is actually quite easy: talk with a local estate planning attorney and get started on creating your estate plan.

Contact us to review your estate plan with one of our experienced estate planning attorneys.

Reference: LA Progressive (Jan. 11, 2023) “Why Estate Planning Is Important Even If You Don’t Have Assets”

 

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Read more about the article Why You Need a Secondary Beneficiary – Annapolis and Towson Estate Planning

Why You Need a Secondary Beneficiary – Annapolis and Towson Estate Planning

A secondary beneficiary, sometimes called a contingent beneficiary, is a person or entity entitled to receive assets from an estate or trust after the estate owner’s death, if the primary beneficiary is unable or unwilling to accept the assets. Secondary beneficiaries can be relatives or other people, but they can also be trusts, charities or other organizations, as explained in the recent article titled “What You Need to Know About Secondary or Contingent Beneficiaries” from Yahoo life.

An estate planning lawyer can help you decide whether you need a secondary beneficiary for your estate plan or for any trusts you create. Chances are, you do.

Beneficiaries are commonly named in wills and trust documents. They are also used in life insurance policies and in retirement accounts. After the account owner dies, the assets are distributed to beneficiaries as described in the legal documents.

The primary beneficiary is a person or entity with the first claim to assets. However, there are times when the primary beneficiary does not accept the assets, can’t be located, or has predeceased the estate owner.

A secondary beneficiary will receive the assets in this situation. They are also referred to as the “remainderman.”

In many cases, more than one contingent beneficiary is named. Multiple secondary beneficiaries might be entitled to receive a certain percentage of the value of the entire estate. More than one secondary beneficiary may also be directed to receive a portion of an individual asset, such as a family home.

Estate planning attorneys may even name an additional set of beneficiaries, usually referred to as tertiary beneficiaries. They receive assets if the secondary beneficiaries are not available or unwilling to accept the assets. In some cases, estate planning attorneys name a remote contingent beneficiary who will only become involved if all of the primary, secondary and other beneficiaries can’t or won’t accept assets.

For example, a person may specify their spouse as the primary beneficiary and children as secondary beneficiaries. A more remote relative, like a cousin, might be named as a tertiary beneficiary, while a charity could be named as a remote contingent beneficiary.

Almost any asset can be bequeathed by naming beneficiaries. This includes assets like real estate (in some states), IRAs and other retirement accounts, life insurance proceeds, annuities, securities, cash and other assets. Secondary and other types of beneficiaries can also be designated to receive personal property including vehicles, jewelry and family heirlooms.

Naming a secondary beneficiary ensures that your wishes as expressed in your will are going to be carried out even if the primary beneficiary cannot or does not wish to accept the inheritance. Lacking a secondary beneficiary, the estate assets will have to go through the probate process. Depending on the state’s laws, having a secondary beneficiary avoids having the estate distribution governed by intestate succession. Assets could go to someone who you don’t want to inherit them!

Talk with your estate planning attorney about naming secondary, tertiary and remote beneficiaries.

Contact us to review your estate plan with one of our experienced estate planning attorneys.

Reference: Yahoo life (Jan. 4, 2023) “What You Need to Know About Secondary or Contingent Beneficiaries”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Read more about the article Some Expenses are Paid by Estate and Some by Beneficiary – Annapolis and Towson Estate Planning

Some Expenses are Paid by Estate and Some by Beneficiary – Annapolis and Towson Estate Planning

Settling an estate can be complex and time-consuming—it all depends on how much “estate planning” was done. According to a recent article from Yahoo Finance titled “What Expenses Are Paid by the Estate vs. Beneficiary?” the executor is the person who creates an inventory of assets, determines which expenses need to be paid and distributes the remainder of the estate to the deceased’s beneficiaries. How does the executor know which monies are paid by the estate and which by the beneficiaries?

First, let’s establish what kind of expenses an estate pays. The main expenses of an estate include:

Outstanding debts. The executor has to notify creditors of the decedent’s death and the creditors then may make a claim against the estate. Because a person dies doesn’t mean their debts disappear—they become the debts of the estate.

Taxes. There are many different taxes to be paid when a person dies, including estate, inheritance and income tax. The federal estate tax is not an issue, unless the estate value exceeds the exemption limit of $12.92 million for 2023. Not all states have inheritance taxes, so check with a local estate planning attorney to learn if the beneficiaries will need to pay this tax. If the decedent has an outstanding property tax bill for real estate property, the estate will need to pay it to avoid a lien being placed on the property.

Fees. There are court fees to file documents including a will to start the probate process, to serve notice to creditors or record transfer of property with the local register of deeds. The executor is also entitled to collect a fee for their services.

Maintaining real estate property. If the estate includes real estate, it is likely there will be expenses for maintenance and upkeep until the property is either distributed to heirs or sold. There may also be costs involved in transporting property to heirs.

Final expenses. Unless the person has pre-paid for all of their funeral, burial, cremation, or internment costs, these are considered part of estate expenses. They are often paid out of the death benefit associated with the deceased person’s life insurance policy.

What expenses does the estate pay?

The estate pays outstanding debts, including credit cards, medical bills, or liens.

  • Appraisals needed to establish values of estate assets;
  • Repairs or maintenance for real estate
  • Fees paid to professionals associated with settling the estate, including executor, estate planning attorney, accountant, or real estate agent;
  • Taxes, including income tax, estate tax and property tax; and
  • Fees to obtain copies of death certificates.

The executor must keep detailed records of any expenses paid out of estate assets. The executor is the only person entitled by law to see the decedent’s financial records. However, beneficiaries have the right to review financial estate account records.

What does the beneficiary pay?

This depends on how the estate was structured and if any special provisions are included in the person’s will or trust. Generally, expect to pay:

  • Final expenses not covered by the estate;
  • Personal travel expenses;
  • Legal expenses, if you decide to contest the will; and
  • Property maintenance or transportation costs not covered by the estate.

Some of the expenses are deductible, and the executor must use IRS Form 1041 on any estate earning more than $600 in income or which has a nonresident alien as a beneficiary.

An estate planning attorney is needed to create a comprehensive estate plan addressing these and other issues in advance. If little or no planning was done before the decedent’s death, an estate planning attorney will also be an important resource in navigating through the estate’s settlement.  Contact us to review your estate plan with one of our experienced estate planning attorneys.

Reference: Yahoo finance (Dec. 29, 2022) “What Expenses Are Paid by the Estate vs. Beneficiary?”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

What Is Included in an Estate Inventory? – Annapolis and Towson Estate Planning

The executor’s job includes gathering all of the assets, determining the value and ownership of real estate, securities, bank accounts and any other assets and filing a formal inventory with the probate court. Every state has its own rules, forms and deadline for the process, says a recent article from Yahoo! Finance titled “What Do I Need to Do to Prepare an Estate Inventory for Probate,” which recommends contacting a local estate planning attorney to get it right.

The inventory is used to determine the overall value of the estate. It’s also used to determine whether the estate is solvent, when compared to any claims of creditors for taxes, mortgages, or other debts. The inventory will also be used to calculate any estate or inheritance taxes owed by the estate to the state or federal government.

What is an estate asset? Anything anyone owned at the time of their death is the short answer. This includes:

  • Real estate: houses, condos, apartments, investment properties
  • Financial accounts: checking, savings, money market accounts
  • Investments: brokerage accounts, certificates of deposits, stocks, bonds
  • Retirement accounts: 401(k)s, HSAs, traditional IRAs, Roth IRAs, pensions
  • Wages: Unpaid wages, unpaid commissions, un-exercised stock options
  • Insurance policies: life insurance or annuities
  • Vehicles: cars, trucks, motorcycles, boats
  • Business interests: any business holdings or partnerships
  • Debts/judgments: any personal loans to people or money received through court judgments

Preparing an inventory for probate may take some time. If the decedent hasn’t created an inventory and shared it with the executor, which would be the ideal situation, the executor may spend a great deal of time searching through desk drawers and filing cabinets and going through the mail for paper financial statements, if they exist.

If the estate includes real property owned in several states, this process becomes even more complex, as each state will require a separate probate process.

The court will not accept a simple list of items. For example, an inventory entry for real property will need to include the address, legal description of the property, copy of the deed and a fair market appraisal of the property by a professional appraiser.

Once all the assets are identified, the executor may need to use a state-specific inventory form for probate inventories. When completed, the executor files it with the probate court. An experienced estate planning attorney will be familiar with the process and be able to speed the process along without the learning curve needed by an inexperienced layperson.

Deadlines for filing the inventory also vary by state. Some probate judges may allow extensions, while other may not.

The executor has a fiduciary responsibility to the beneficiaries of the estate to file the inventory without delay. The executor is also responsible for paying off any debts or taxes and overseeing the distribution of any remaining assets to beneficiaries. It’s a large task, and one that will benefit from the help of an experienced estate planning attorney.

Reference: Yahoo! finance (Dec. 3, 2022) “What Do I Need to Do to Prepare an Estate Inventory for Probate”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Read more about the article What Happens When Gift and Estate Tax Exemptions Change? – Annapolis and Towson Estate Planning

What Happens When Gift and Estate Tax Exemptions Change? – Annapolis and Towson Estate Planning

The federal lifetime gift and estate tax exclusion will increase for inflation in 2023 to $12.93 million.  There may be similar increases for inflation in 2024 and 2025, according to a recent article from Think Advisor titled “The Estate and Gift Tax Exclusion Shrinks in 2026. What’s an Advisor to Do?”

This is the good news for wealthy Americans. However, there’s bad news in the near future. Under the Tax Cuts and Jobs Act, these historically high levels will end on December 31, 2025. Estate and gift exclusions will drop to the pre-2017 level of $5 million, adjusted for inflation. Estimates for 2026 vary, but most expect the amount may reach $6.8 million per person.

For Americans who saw the value of their homes and portfolios increase in the last ten years, this level becomes uncomfortably close when considering the overall value of their estate. Here’s some help on how to minimize estate taxes in coming years.

What is the Estate and Gift Tax Exclusion in 2023?

Every year the annual estate and gift tax exclusion is adjusted for inflation. Gifts at or below this amount are not counted towards your lifetime exemption. For example, in 2022, the annual exclusion was $16,000 and in 2023, it is $17,000.

If you haven’t made any gifts to remove assets from your estate before 2026, your lifetime gift and estate tax exemption will revert to 2026 levels. If you made gifts prior to 2026, several different scenarios may apply.

If the amount of your gift was less than the exemption amount in place in 2026 or beyond, your remaining exclusion will be the amount of the exemption minus the amount of your lifetime gifts. Let’s say the exclusion is $6.8 million and you’ve given $3 million in lifetime gifts. The remaining exclusion would be $3.8 million. Any gifts over this amount would be subject to estate taxes.

If the amount of your gifts before 2026 exceeded the limit in place, the exemptions from the old limits will apply to those gifts. However, there won’t be any additional exemptions. Here’s an example: if you made $9 million in gifts before 2026, this would be your exemption amount upon your death. There would be no additional exemption for 2026 or beyond, unless the inflation-adjusted exemption exceeded $9 million in the future.

To be blunt, the higher exemption amounts in place are “use it or lose it.” Any difference between the higher exemption amounts and the post-2025 reduced amounts will be lost if not used. Any gifts made in excess of the higher exemptions in place before 2026 will still fall under the higher exemption upon death.

There are steps to be taken to reduce your taxable estate and make the most of the current limits. Which steps to take depends on the size of the estate, the nature of heirs, marital status, health status and other factors.

One strategy is to spend down assets. Take the big vacations, travel to out-of-town sporting events, enjoy the wealth you worked so hard to accumulate. This lifestyle can add up over time and fit in with an overall plan of minimizing your taxable estate.

Gifting to charity is another excellent way to reduce the size of a taxable estate while building a legacy. Current-year gifts of cash appreciated securities and other assets can provide a tax deduction to also reduce current year income taxes. Contact us to speak with one of our experienced estate planning attorneys about using a Donor Advised Fund, Charitable Lead Trust, or Charitable Remainder Trust.

If you are married, assets left to a surviving spouse have no estate tax consequences, except for a non-citizen spouse, who may not benefit from the unlimited marital deduction rules. One option is for the surviving spouse to elect to take the decedent spouse’s unused lifetime exclusion.

Reference: Think Advisor (Dec. 7, 2022) “The Estate and Gift Tax Exclusion Shrinks in 2026. What’s an Advisor to Do?”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Read more about the article Do Unified Credit Gift Tax Exclusions Work? – Annapolis and Towson Estate Planning

Do Unified Credit Gift Tax Exclusions Work? – Annapolis and Towson Estate Planning

Most people know they pay taxes on earnings and when money grows. However, there are also taxes when money or other assets are given away or passed to another after death. The unified tax credit is central to estate planning, says a recent article titled “What Are The Unified Credit’s Gift Tax Exclusions?” from yahoo!.

First, what is the Unified Tax Credit? Sometimes called the “unified transfer tax,” the unified tax credit combines two separate lifetime tax exemptions. The first is the gift tax exclusion, which concerns assets given to other individuals during your lifetime. The other is the estate tax exemption, which is the value of an estate not subject to taxes when it is inherited. Your estate or heirs will only pay taxes on the portion of assets exceeding this threshold.

The unified tax credit is an exemption applied both to taxable gifts given during your lifetime and the estate you plan to leave to others.

If you would rather gift with warm hands while living, you can pull from this unified credit and avoid paying additional taxes on monetary gifts in the year you gave them. However, if you’d rather keep your assets and distribute them after death, you can save the unified credit for after death. You can also use the unified tax credit to do a little of both.

The unified tax credit changes regularly, depending on estate and gift tax regulations. The gift and estate tax exemptions doubled in 2017, so the unified credit right now sits at $12.06 million per person in 2022. This will expire at the end of 2025, when credits will drop down to lower levels, unless new legislation passes.

Up to 2025, a married couple can give away as much as $24.12 million without having to pay additional taxes. The recipient of this generous gift would not have to pay additional taxes either. If you consider the rate of estate taxes—40%—optimizing this unified tax credit means a lot more money stays in your loved one’s pockets.

How does it work? Let’s say you have four children and each one is going to receive a taxable gift of $500,000. You can pull from your unified tax credit the same year you give these gifts. This way, there’s no need for you to pay gift taxes on the $2 million.

However, this generosity will reduce your lifetime unified credit from $12.06 million to $10.06 million. If you die and leave an estate worth $11.5 million, your heirs will need to pay estate taxes on the $1.44 million difference.

At current estate tax rates, roughly $700,000 would go to the IRS, or more, depending upon your state!

The unified tax credit doesn’t take into account or apply to annual gift exclusions. These annual exclusions allow you to give away even more money during your lifetime and it doesn’t count against your unified limit. As of 2022, taxpayers may give $16,000 per year to any individual as a tax-exempt gift. You can give $16,000 to as many people as you wish each year without being subject to gift taxes. This is a simple way to gift with warm hands without paying gift taxes or reducing the unified limit. The annual gift is per person, so if you are married, you and your spouse may give, $32,000 per year to as many people as you want, and the gift is excluded.

Taxable gifts exceeding the annual gift exclusion amount must be properly documented and should be done in concert with your overall estate plan. They offer great tax advantages, and perhaps more importantly, provide the giver with the joy of seeing their wealth translate into a better life for their loved ones.

Reference: yahoo! (Nov. 18, 2022) “What Are The Unified Credit’s Gift Tax Exclusions?”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys