No matter the size of your estate, it is imperative that you have a proper estate plan in order to ensure that the intended individuals or organizations inherit your assets. An estate plan can help to limit the tax implications for beneficiaries. Here are a few basic estate planning tips to get you started.
Designate Who Gets What
If you do not have a will, your state’s laws will govern who inherits your assets. This is not limited to money. Things like a favored piece of jewelry or artwork will be passed down according to state laws.
You will want to check which assets your will can govern. Some tax-deferred retirement accounts and life insurance policies with named beneficiaries will supersede your will. Check with the financial institution that holds the asset for clarification.
Decide How It Will Be Spent
If you desire to have certain assets earmarked to cover specific expenses, you might want to consider creating a trust to handle this. For example, you might want to have specific funds designated to cover college expenses for a certain individual or individuals. The trustee of the trust is legally obligated to make sure the money is used for those expenses.
Minimize Estate and Income Taxes
There are some tax-efficient strategies you can often implement to reduce the amount of taxes owed by your beneficiaries. As an example, if you are planning on leaving money to charities, use your taxable assets. As a charity, they won’t pay taxes on the assets. You can then use tax-free assets like Roth retirement accounts and life insurance to leave behind for your other beneficiaries.
While alive, you can also start to reduce your taxable estate by gifting amounts to your beneficiaries. Up to $13,000 a year can be given as a gift and will not be taxable.
Leverage Life Insurance To Pay Taxes
A significant portion of your beneficiaries’ inheritance can be swallowed up by estate and income taxes. You can use life insurance to help with this. “For example, let’s say it is estimated that one of your beneficiaries will owe $75,000 in estate and income tax,” explains David Grant, a Las Vegas based estate attorney. “You can purchase a life insurance policy with a death benefit of $75,000 and name the person in question as the beneficiary,” he continues. “The life insurance proceeds will be paid to the beneficiary tax-free, so they will have the entire $75,000 available to cover taxes.”
Today it is easy to shop around and get multiple quotes to find cheap term life insurance. There really is no excuse not to make this part of your estate plan.
Too often people only focus on the areas of their finances that impact them during their lifetime and neglect putting an estate plan into place. This can be costly for your beneficiaries, and can sometimes even lead to bitter feelings if some feel they were unfairly left with nothing from your estate. This is not something you should put off.