Depending on where they lived and how much their wealth was, a person’s assets may be liable to estate and inheritance taxes when they pass away.
While estate and inheritance taxes are a possibility, a large proportion of estates are too modest to be taxed by the federal government. In fact, it is now the case that in 2021 that an individual can have an estate valuing less than $11.70 million, and their heirs will not be taxed on it.
Yet, many who fail to take estate planning seriously overlook certain factors where they could be paying more money out than they ever thought possible!
Let’s look at five vital estate planning tips. By following these tips, you should be in a much better position to protect your legacy and wealth.
1. Draw-Up a Will
Although it seems like a no-brainer, many people fail to write a will.
The 2020 Estate Planning and Wills Study by Caring.com showed only 32% of respondents indicated they have a will. Furthermore, 30.4 percent of those who didn’t have a will said it’s because they don’t have enough assets to justify one.
However, many fail to realize that if you die without a will, a probate court will divide your assets, which can cost your beneficiaries a lot of money.
Therefore, it is crucial even to draw up one of the most basic wills, rather than not at all. But, a much better option is to seek professional advice and help make sure you cover all your bases relevant to the particular state you live in.
Lastly, it’s wise to revisit your will regularly to keep it up-to-date and in line with your wishes. This might be especially a good idea if there are changes in your family’s relationship.
2. Check All Your Beneficiaries
Contrary to popular thought, all of your estate might not be controlled by your will.
Some aspects of your estate, like life insurance plans and retirement funds, let you decide on your beneficiaries. An account without a stated beneficiary will have to go to a probate court, where a judge will decide who gets your money.
Also, keep in mind that any of your listed beneficiaries can overrule anything you write in your will.
Therefore, it’s a good idea to double-check beneficiary information following every significant life event. These events can include marriage, divorce, or the birth of a child.
3. Consider Setting Up a Trust
If you have a large estate or have concerns that your heirs will mismanage it, you can create a trust and choose a trustee to disperse your assets.
There are various ways to set up a trust, but permanent or irrevocable trusts may provide the most tax benefits. When you put in an irrevocable trust, your ownership of the assets is lost; they become the trust’s property.
As a consequence, your funds become exempt from estate taxes. And while a trustee ultimately controls the money, you can put restrictions on how it is used, and money can be distributed from a trust while you are still living.
Moreover, funds held in a trust are not subject to probate, which might be advantageous for those who prefer not to have their possessions discussed in public. So what you’re getting is more privacy following this course of action.
Keep in mind that you’ll want to contact an estate attorney to figure out how to make one that matches your needs best because trusts are so complicated.
4. Look Into Roth Accounts
If you have a traditional IRA or 401(k) accounts for your retirement, you may unintentionally leave a hefty tax obligation to your heirs.
The problem with an IRA account, for example, is that whoever you leave it to, they inherit your tax obligations for the account. And in general, distributions from standard retirement accounts are subject to regular income tax.
Nonspousal heirs, such as children, previously had the option of deferring distributions for the rest of their lives, effectively lowering the total tax burden.
However, the law implies you must fully liquidate your account within ten years of your death. So if you leave your children or other beneficiaries with a large retirement account to distribute, the tax contributions could be considerable.
Progressively convert your traditional funds to Roth accounts with tax-free distributions.
By doing this, you can avoid leaving your beneficiaries with a tax charge. Because the amount converted will be taxable on your income taxes, the idea is to keep the conversions to a minimum each year, so you don’t end up in a higher tax bracket. Therefore, it’s better to start this strategy sooner rather than later for maximum benefits.
5. Gift Your Money Before You Pass On
Giving your money to your heirs while you’re still living is one of the best methods to ensure it stays in the family.
Individuals can contribute up to $15,000 per person per year in gifts as of 2020, says the IRS. If you’re concerned about your estate being taxed, those gifts may reduce the worth of your estate. The money is also tax-free for those who receive it.
Be cautious giving away things that rise in value, such as houses or stocks. Such assets can be given a step-up in basis, meaning when you pass on, the asset’s taxable value is changed. So it might be better to leave such assets in a will rather than gift them beforehand.
However, there are ways of avoiding a step-up in basis in some states. We recommend you read this article to find out more and get valuable estate planning help.
Lastly, there’s always the option of charitable donations. These can be issued as one-off payments or through other mechanisms over a chosen timeframe.
Estate Planning Avoidance Can Be Costly
Estate planning can be intimidating due to complex strategies and the constantly changing tax legislation. Even if you don’t have a lot of money in the bank, ignoring it might be a costly error for your heirs.
If you value your hard-earned cash and assets and want your heirs to benefit from them through inheritance, we recommend you start planning right away.
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