Many individuals would prefer their money be kept in the family. If you are one of those individuals, read on for some good ways to achieve that. This article was written by Maryalene LaPonsie and appeared in USNews online on 10/17/23. (Note: A few things are a bit out-of-date, but the majority of the content is still a worthwhile read.)
“Don’t let the inheritance you leave get eaten away by taxes or given to the wrong person.
Don’t keep your estate plans a secret. At the very least, be sure to notify the individual you are designating as an executor or the guardian of your children.
Regardless of whether you have $20,000 or $2 million in the bank, you need an estate plan.
“A lot of people think estate planning or having a will is something only wealthy people have, but that’s not the case,” says Claire Steinman, counsel with law firm Leech Tishman in New York City.
Even those with modest savings will want to ensure their property and assets go to the heirs of their choosing, not the government’s. Plus, a will is essential for those with minor children since it can dictate who receives custody should both parents pass away at the same time.
Most families won’t have to worry about paying federal estate taxes after a death – the basic exclusion amount is $12.92 million for 2023 – but heirs may be responsible for paying federal income taxes on some assets and retirement accounts.
All are good reasons to start working on your estate plan today. Here are some tips to get you started:
- Enlist the right professionals.
- Draw up a will.
- Check your beneficiaries.
- Set up a trust.
- Convert traditional retirement accounts to Roth accounts.
- Gift your money while you’re alive … wisely.
- Share your plans with loved ones.
Enlist the Right Professionals
Laws regarding how estates are handled vary by state. For this reason, it is wise to seek the advice of a local, competent professional, especially if you have a large estate or a complicated financial situation.
“Seek an attorney who is board-certified in estate planning,” says Robb Armstrong, vice president and senior trust officer with Arden Trust Company in West Palm Beach, Florida. You may also want to consult an accountant with an advanced degree in taxation, he suggests.
Working with the right professionals not only ensures all your documents are prepared correctly, but they may also be able to anticipate problems before they occur.
For instance, estates that have many illiquid assets have the potential to cause issues for heirs, according to Conrad Ciccotello, director of the Reiman School of Finance in the Daniels College of Business at the University of Denver.
These include estates that contain family farms, businesses or other property that can’t be easily split. While one heir may want to keep the asset, others may want to cash out their portion.
An experienced estate attorney may be able to evaluate options to put cash into an otherwise illiquid estate and potentially avoid conflicts between heirs.
Draw Up a Will
Writing a will is the most basic of estate planning strategies. This document stipulates how your assets will be divided after your death and can be used to indicate who you would – or would not – want to have custody of any minor children.
“The challenge with this is half the adults in the U.S. don’t have a will,” Ciccotello says. That may be because people simply don’t want to think about death, or perhaps they aren’t sure how to divide their assets. “It’s very hard to get clarity about what you want to do,” he notes.
Without a will, your estate will be divided in probate court, meaning someone else decides who gets your money. But keep in mind that even estates with wills have to go through the court system.
“Some people think that by having a will they will avoid probate,” Armstrong says. The court still needs to review and confirm that the will is valid. “It takes time to probate a will. It costs money.”
Check Your Beneficiaries
One way to avoid probate court is to have beneficiaries named for each of your assets. Some accounts, such as retirement funds and life insurance policies, let owners name beneficiaries easily through their online account.
Some states allow for beneficiary deeds which make it easy to transfer property to someone else upon your death. Other accounts may be set up with transfer-on-death provisions, and this is the cheapest and easiest way to pass assets to heirs.
Since a beneficiary or TOD designation trumps anything written in a will, it’s a good idea to review beneficiary information after every major life change, including the birth of children, marriage or divorce.
Set Up a Trust
If you have a sizable estate or are worried your heirs won’t be wise with your money, you can set up a trust and appoint a trustee to distribute your wealth. This approach also ensures your assets don’t get tied up in court.
“You completely avoid the need to probate a will,” Steinman says. This can be useful if you think someone might object to a will and file a legal challenge. “(Using a revocable trust) bypasses that whole scenario.”
Trusts can be set up in several ways, but irrevocable, or permanent, trusts may offer the most tax benefits. When money is put into an irrevocable trust, the assets no longer belong to you. They belong to the trust itself.
As a result, the money cannot be subject to estate taxes. While a trustee ultimately controls the money, you can create stipulations on its use, and money can be distributed from a trust even while you are alive.
The trustee can be someone you know personally, such as a friend or family member. Or if you don’t know anyone willing to take on this role, corporate trustees such as the Arden Trust Company can be used.
Because of the complex nature of trusts, you’ll want to consult with an experienced estate attorney to determine how best to create one that meets your goals.
Convert Traditional Retirement Accounts to Roth Accounts
Those with traditional 401(k) or IRA accounts could inadvertently leave their heirs a big tax bill. That’s because regular income tax must be paid on distributions from all traditional retirement accounts.
In the past, nonspousal heirs such as children had the option to stretch those distributions over their lifetime, effectively reducing the total taxes due. But now, heirs other than spouses must withdraw all money from an account within 10 years. If the account balance is large, that could require significant distributions that may be taxed at a higher rate.
If you’re looking for how to pass money to heirs tax free, that may be accomplished by converting traditional accounts to Roth accounts. “Roth structures are really nice for heirs,” Ciccotello says.
The converted amount is subject to regular income taxes, but withdrawals – either by you or your heirs – are tax free. What’s more, with tax rates at near historic lows, it may be better to pay taxes on the money now rather than later.
Gift Your Money While You’re Alive … Wisely
You might not have to worry about estate tax planning if you simply give away your money while you’re alive. As of 2023, the IRS allows individuals to give up to $17,000 per person per year in gifts. If your goal is avoiding estate tax, those gifts can bring its value down. The money is also tax-free for recipients.
Even if you don’t need the tax benefits, making gifts while you are alive allows you to see how they positively impact your loved ones. “In my personal opinion, gifts in life are preferred to bequests in death,” Ciccotello says.
However, be careful about giving away assets that appreciate in value, such as stocks or a house, which receive a step-up in basis when part of an estate.
That means the taxable amount of an asset is adjusted upon the owner’s death and, as a result, it may be beneficial to transfer certain assets after death rather than before. Speak to a tax professional for guidance in this area.
Another way to reduce your estate value is through charitable donations. Rather than giving a one-time gift, consider setting up a donor-advised fund. This option would give you an immediate tax deduction for money deposited in the fund and then let you make charitable grants over time. A child or grandchild could be named as a successor in managing the fund as well.
There are also trusts designed for donating significant assets to charity while still creating a stream of income for yourself or your heirs.
Share Your Plans With Loved Ones
Don’t keep your estate plans a secret. At the very least, be sure to notify the individual you are designating as an executor or the guardian of your children. You don’t want to catch them by surprise.
“Make sure the people you are appointing know this and that they are willing to take it on,” Steinman says.
You may also want to consider discussing your plans with adult children or other heirs, particularly if you aren’t evenly distributing your assets. This could be a difficult conversation, but it may also eliminate potential legal challenges to your will or hard feelings between heirs after you’re gone.
“I would want my family to know exactly what my intent is,” Armstrong says.
Complex strategies and the ever-evolving tax code can make estate planning feel intimidating. However, ignoring it can be a costly mistake for your heirs, even if you don’t have a lot of money in the bank. Talk to a professional to see if these estate planning strategies may be right for you.”
If you are interested in protecting your hard-earned assets and loved ones, let’s meet to discuss your unique situation and goals. Together, we can develop an estate plan to cross all the t’s and dot all the i’s. There are NO cookie-cutter plans, just like there are no cookie-cutter family situations. Why not call today and schedule our meeting early in January? I look forward to hearing from you. You can reach me at 513-399-7526 or go online to www.davidlefton.com and use the online scheduling feature there.
Source: USNews; 10/17/23 by Maryalene LaPonsie