When considering the creation of your estate plan, the decision of whether to hire an attorney or an estate tax professional depends on your individual circumstances.
If you have a small estate and straightforward wishes, using an online or packaged will-writing program may be sufficient. These programs typically take into account Internal Revenue Service (IRS) and state-specific requirements and guide you through the process of writing a will by conducting an interview with you about your life, finances, and desired bequests. You can also make updates to your self-made will as needed.
If you have any uncertainties about the process, it may be beneficial to seek advice from an estate planning attorney and potentially a tax advisor. They can assist you in determining if your estate planning is on the right track, especially if you reside in a state with its own estate or inheritance taxes.
For larger and more complex estates that involve special child care considerations, business matters, or non-family beneficiaries, engaging an estate attorney or a tax professional may be advantageous. Each one possesses the expertise to navigate the potentially intricate implications of such situations.
Estate planning serves as a means to minimize estate and inheritance taxes, although the majority of individuals are not required to pay these taxes.
Inheritance tax and estate tax are distinct concepts. Inheritance tax pertains to the payment required by the beneficiary who receives inherited wealth. Estate tax refers to the portion deducted from an individual's estate upon their death, based on its value.
The applicability of either tax, or both, depends on the circumstances surrounding an individual's passing.
At the federal level, there exists no inheritance tax, but there is a federal estate tax. The federal estate tax is generally applicable to assets exceeding $12.06 million in 2022 and $12.92 million in 2023, with tax rates ranging from 18 percent to 40 percent. Some states also impose estate taxes, with potentially lower exemption thresholds compared to the IRS. It is important to consult the list of states to determine their specific requirements. Notably, assets inherited by spouses are usually exempt from estate tax.
Because of the distinct nature of estate tax and inheritance tax, some individuals may occasionally face a dual burden. For instance, Maryland imposes both estate tax and inheritance tax, resulting in the estate being subject to payments to both the IRS and the state. Beneficiaries may also have to make additional payments to the state using the remaining inheritance. However, such a situation is not the norm across the entire country.
If you reside in a state with an estate tax, the positive aspect is that, generally speaking, your estate tax bill is deducted from the value of your taxable estate before calculating your potential obligations to the IRS.
In the tri-state area, Connecticut and New York have an estate tax, New Jersey does not. Connecticut's exclusion amount is $12.92 million in 2023, while New York's 2023 exclusion amount is $6.58 million.
Estate planning should evolve with life's changes.
It is crucial to reassess your estate plan whenever your circumstances undergo significant transformations, whether positive or negative. This could involve events such as marriage, divorce, the arrival of a child, the passing of a loved one, securing a new job, or experiencing termination.
Even if your circumstances remain unchanged, it is advisable to periodically review your estate plan. Laws and regulations may have undergone revisions, necessitating adjustments to ensure your plan remains aligned with current requirements.
Revising your plan will require some effort, but take comfort in knowing that the need for revision indicates you have already avoided the most significant estate planning mistake: neglecting to create a plan altogether.