IF YOU'RE SINGLE AND die in 2020, you can have up to $11.58
million in assets before your heirs have to worry about paying a penny in
Knowing that, you might assume only the super wealthy need
to worry about estate planning. However, financial planners say you'd be wrong
to think planning is only necessary for the 1%.
"Estate taxes are only part of it," says Jeff
Bush, president of Informed Family Financial Services in Norristown,
Pennsylvania. "Often, there are income tax ramifications."
Heirs may be responsible for paying federal income taxes on
retirement accounts, and some states have their own estate taxes as well. Plus,
"(You) want to make sure (your) stuff goes to the right people," says
Patrick Simasko, elder law attorney and wealth preservation specialist at
Simasko Law in Mount Clemens, Michigan.
Meeting with an accountant and an estate attorney is the
best way to sort through complex issues surrounding estate planning. While
you're talking to the pros, ask them about the following five tips.
- Draw up a will.
- Check your beneficiaries.
- Set up a trust.
- Convert traditional retirement accounts to Roth
- Gift your money while you're alive … but wisely.
Draw Up a Will
It's an obvious first step, but many people don't even
bother to draw up a will. In fact, only 32% of people say they have a will,
according to the 2020 Estate Planning and Wills Study, which was published by
Caring.com and based on survey results from 2,400 Americans. Of those who don't
have a will, 30.4% say it's because they don't have enough assets to warrant
However, without a will, your estate must be divided in
probate court, a process that could leave your beneficiaries footing a big
bill. "The last thing you want … is to die without a will," says
David Zoll, managing director and partner with Treasury Partners, a wealth
advisory firm in New York City.
Once a will is drawn up, it should be revisited on a regular
basis. "The laws do change," Zoll says. "Family relationships
Check Your Beneficiaries
Not all assets are disbursed through a will. Some accounts,
such as retirement funds and life insurance policies, let owners name
beneficiaries for that particular asset. Without a named beneficiary, an
account will need to go to probate court, where a judge will decide who gets
"Your named beneficiaries will supersede whatever you
have in your will," Bush says. For that reason, 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 sizeable 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.
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.
What's more, money in a trust isn't subject to probate,
which can be beneficial for those who would rather not have their assets
discussed in a public court. "It provides an element of privacy,"
Because of the complex nature of trusts, you'll want to
consult with an estate attorney to determine how best to create one that meets
Convert Traditional Retirement Accounts to Roth Accounts
Those with traditional 401(k) or IRA accounts could
inadvertently leave their heirs a big tax bill. "When your children
inherit the IRA, they inherit the income tax liability that goes along with
it," Bush says.
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.
"Now the account has to be completely liquidated within
10 years after the death," says Eric Bronnenkant, head of tax for online
advisory firm Betterment. If the account balance is large, that could require
significant distributions that may be taxed at a higher rate.
You can avoid leaving your beneficiaries with that tax bill
by gradually converting traditional accounts to Roth accounts that have
tax-free distributions. Since the amount converted will be taxable on your
income taxes, the goal is to limit each year's conversion so it doesn't push
you into a higher tax bracket.
Gift Your Money While You're Alive … But Wisely
One of the best ways to ensure your money stays in the
family is to simply give it to your heirs while you're alive. As of 2020, the
IRS allows individuals to give up to $15,000 per person per year in gifts. If
you're worried about your estate being taxable, those gifts can bring its value
down. The money is also tax-free for recipients.
However, be careful about giving away assets that appreciate
in value such as stocks or a house. "Normally when you pass away, those
assets get a step-up in basis," Bronnenkant says. 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.
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.
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