Introduction
As the days lengthen and the weather warms up, it’s clear that spring is on the horizon, signaling the arrival of tax season. This year, the deadline for filing income tax returns is Monday, April 15, 2024. Whether you have already submitted your return or are still gathering your documents, tax season is also an opportune time to create or update your estate plan. This timing is ideal because you already have your financial paperwork readily available, and you are likely reflecting on the individuals and causes you supported over the past year.
Estate planning involves the process of determining who will receive your assets and manage your estate after your death. Depending on your financial situation and personal needs, this could encompass actions like drafting a last will and testament or establishing a revocable living trust.
Three Compelling Reasons
While estate planning might seem like an additional burden during tax season, there are three compelling reasons to consider creating a will or trust at this time. Here’s a detailed look at these reasons:
1. You Have a Clear Picture of Your Assets
During tax season, your property and financial assets are already at the forefront of your mind. You are likely reviewing tax forms for the properties you own and going through statements for your financial accounts. Given that you are already focused on your assets, it’s a convenient time to decide who should inherit them when you pass away or to ensure your estate plan accurately reflects everything you own.
If you don’t yet have an estate plan, start by listing any assets for which you’ve received tax forms, such as bank or investment accounts. Include identifying information like the custodian and account number. Once you have this initial list, continue by adding other assets you own.
If you already have an estate plan but haven’t updated it in a while, now is a good time for a review. Does your plan cover all your current assets, including your home, vehicle, and financial accounts? Does it reflect your current relationships with your spouse, children, and other family members? Was it created in the state you currently reside in? If you’ve experienced changes in your tax filing status, your estate plan likely needs an update as well.
2. Ensure Your Estate Plan is Tax-Advantaged
Although preparing your tax return can be tedious, tax season is when you are most attuned to your financial situation. Understanding your wealth can help you determine if your estate might be subject to estate tax and whether you should consult with an estate attorney.
Estate tax is levied on your assets after you die and can be collected at both the state and federal levels. For 2024, the U.S. federal estate tax exemption is $13.61 million for individuals and $27.22 million for married couples. This means that if your estate is valued below these amounts, you likely won’t owe federal estate tax. However, state-level estate taxes could still apply, depending on where you live at the time of your death.
Inheritance tax is a different tax that your heirs might have to pay when they inherit assets from your estate. There is no federal inheritance tax, and most states do not impose it, but a few states do, so it’s something to consider.
If you own substantial assets, estate taxes could significantly reduce your estate’s value if you don’t plan ahead. By understanding your wealth and the implications of estate taxes, you can create an estate plan that best suits you and your loved ones.
3. It’s One of the Most Important Legal Documents You’ll Ever Create
Among the various legal documents you will prepare in your lifetime, your estate plan might be the most crucial. With a will or trust, you can designate who will inherit your assets, name guardians for your children, appoint caretakers for your pets, and even allocate part of your estate to charitable causes. By crafting an estate plan, you can control your legacy and potentially make a positive impact on the world.
How to Create or Update Your Estate Plan This Tax Season
Although the idea of creating an estate plan might seem as daunting as filing your taxes, it can be done in less time than it takes to watch an episode of your favorite show. Plus, it provides peace of mind knowing that your loved ones are protected.
There are several ways to create your will or trust. Using an online template is a popular method. If you believe your estate won’t be subject to estate tax, you might consider using an online will-maker to generate your legally valid will forms quickly. Just answer a few questions about yourself, your estate, and your wishes, and you’ll receive the forms and instructions needed to make your will valid in your state.
If you want to avoid the probate process, setting up a revocable living trust instead of a traditional will could be beneficial. Lastly, if you have a large estate or complex family dynamics, it’s generally wise to work with an estate attorney. They can help you create an estate plan tailored to your needs and the people and causes you care about.
FAQs
What is the difference between a will and a trust?
Both wills and trusts are tools for estate planning, but they serve different purposes. A will outlines who will receive your assets and appoints guardians for minor children after your death. A trust, on the other hand, can manage your assets during your lifetime and distribute them after your death, potentially avoiding probate.
Why should I update my estate plan?
Life changes such as marriage, divorce, the birth of a child, or significant changes in financial status can all impact your estate plan. Regular updates ensure that your wishes are accurately reflected and that your assets are distributed according to your current circumstances.
What happens if I die without a will?
If you die without a will, your estate will be distributed according to state intestacy laws. This means that the state will decide who inherits your assets, which might not align with your wishes.
Can I create a will or trust without a lawyer?
Yes, you can create a will or trust without a lawyer using online templates or will-making software. However, if your estate is large or complex, consulting with an estate attorney is advisable to ensure that your estate plan is legally sound and comprehensive.
What is probate, and how can I avoid it?
Probate is the legal process of distributing a deceased person’s assets. It can be time-consuming and costly. Creating a revocable living trust is one way to avoid probate, as assets held in the trust can be distributed without court intervention.
How often should I review my estate plan?
It’s a good idea to review your estate plan every three to five years or after significant life events such as marriage, divorce, the birth of a child, or major changes in financial status.
Conclusion
Taking the time to establish or update your estate plan this tax season can be a meaningful step towards securing your financial legacy and ensuring that your wishes are honored. By reviewing your assets, understanding tax implications, and creating crucial legal documents, you can provide peace of mind for yourself and your loved ones. Don’t let the opportunity pass by—start your estate planning today.
