Estate Question: Distributing the Inheritance

One of the most common concerns people have regarding their estate is how it will be distributed, especially when considering sizeable estates with large values. Among some of the greatest concerns are the underlying questions regarding the estate’s tax burden, avoiding probate and the responsibility of the inheritance recipient(s). Let’s look into each of these points with a few considerations before updating your estate planning documents with Richard Cunningham Law.

Tax Burden

There’s a lot to consider when it comes to estate taxes. With some estates that burden is as much as 40 percent of the total estate value. It goes without saying that when you consider the tax burden of your inheritance, it doesn’t feel good to think of nearly half of it going straight to Uncle Sam. After all, you worked hard to build your legacy, and you’ve paid taxes on it all along the way. Inheritances are not considered income, and aren’t taxed as such unless the funds came from an inherited IRA account.

Two Ways to Avoid Estate Tax

Create An Irrevocable Life Insurance Trust

A common way people avoid having their life insurance policy from being taxed is to create an irrevocable life insurance trust. In essence, it’s setting up the trust and transferring it to another person. By transferring over your life insurance policy, your death benefits wouldn’t be included in your estate. What makes the trust irrevocable is that it can not be changed without the consent of the beneficiary.

It is important to note that if you die within three years of making the transfer, the benefits from your life insurance policy would still be considered part of your taxable estate.

Fund A Qualified Personal Residence Trust

In this type of trust, as the name suggests, you transfer ownership of your personal residence, which may include your primary residence and/or vacation homes, into a trust. Creating a QPRT offers several benefits. This includes freezing the market value of the residence, immediately reducing the size of your estate.

It is important to note that if you die prior to the trust’s term, your home will still be considered part of your estate. A QPRT is easiest to set up for a rental property.

Avoiding Probate

It is important to make most of the items, especially assets of large value, essentially out of the reach of probate. However, it is nearly impossible to avoid probate completely, even with the most well written wills or well funded trusts. We recommend a detailed asset review to determine the security of your estate. In doing this, we look at each item individually and your estate as a whole.

One of the primary advantages of a trust is to pass property outside of probate court. Property and assets can be passed directly to your named beneficiary. Richard Cunningham Law will make sure that you are well covered, and so is your legacy.

Responsibility of Recipient

Many parents’ biggest concern is how their children will spend their inheritance. Will they spend responsibly? How can I protect them from themselves or others? We don’t want to think of our children as irresponsible, or worse yet, gullible. Yet, it is a fact of life is that even the most responsible people can make costly mistakes. For parents that have seen their children struggle financially, with addiction, or even in relationships, this is a natural fear. If you have these concerns, have an honest conversation with your estate protection attorney. We can discuss ways to distribute your inheritance over time using methods within your estate planning tool kit.

Distribution Provisions for Trusts

When you establish a trust, you will establish provisions for distributing its assets. The distribution provisions to the beneficiaries can offer mandatory and discretionary distributions. Some trusts require all their income to be distributed to an individual beneficiary or a specified group.

An example of the language which may be used to define the limitations of distributions is called the HEMS standard. This language allows the trustee to make distributions for the “Health, Education, Maintenance, and Support” of the trust beneficiaries. Other language may include power to distribute assets for the beneficiaries’ housing or living expenses, wedding and even vacation expenses.

Richard Cunningham Law will help you navigate these issues so your wishes are enacted and your assets and beneficiaries are protected.

The Final Statement

Estate law offers an almost endless number of options for your legacy. Don’t leave anything to chance. Contact Richard Cunningham Law and have a conversation about your estate, and your final wishes. It is our job to help protect your estate for your beneficiaries.

You have questions? We have answers