Many people in the United States feel woefully underprepared for retirement, let alone leaving behind assets for loved ones. However, the estate planning process provides many opportunities to protect your assets and minimize your tax liability, ensuring that they last for your lifetime and that more of your money is passed to loved ones.
A knowledgeable estate planner will be able to give you advice that ensures you are able to transfer the maximum assets possible by employing several strategies, including:
- Set Up a Trust
Trusts protect the interest of your heirs, and they ensure that asset transfers occur according to your wishes. They also allow your heirs to avoid probate court and protect assets from creditors and divorce proceedings in the family. If your assets are substantial, you may also want to consider setting up a Dynasty Trust (also referred to as a Legacy Trust or Generation-Skipping Trust).
These trusts can leave some assets for future generations of your beneficiaries, such as grandchildren and great-grandchildren. Depending upon your unique circumstances, you may want to consider several different types of trusts. An experienced estate planner can help you understand all of your options and decide which is the best choice to meet your unique needs.
- Minimize Your Tax Burden
Depending upon the financial vehicles you use to transfer assets, various tax treatments may apply. For instance, certain inherited assets, such as stocks and mutual funds, receive favorable tax treatment, and leaving these assets to heirs can result in significant tax savings. Gifting assets to beneficiaries while still alive is another common strategy.
Eligible gifts that are excluded from the gift tax (generally those below $15,000 in value given to an individual or $30,000 for a married couple) are entirely tax-free and do not require a gift tax filing. Similarly, any bequests made to charitable organizations are not subject to taxation, and they are deductible from your ordinary income. If you plan to leave any assets to charity, it’s a good idea to understand how they can benefit you and your estate by reducing your tax liability.
- Establish Life Insurance or Tax-Deferred Variable Annuities
When life insurance policies are paid out, the beneficiary receives the proceeds without paying taxes on the funds. This leaves a guaranteed benefit to your heirs, unlike other investments that rely on market performance. In addition to these policies, you might want to consider fixed or variable annuities, which allow you to invest in mutual funds or fixed-income investments.
Another benefit is that annuities held in a 401(k) plan are portable, allowing those who inherit them to transfer the annuity into another plan, rather than forcing them to liquidate it immediately, which can result in charges and fees. Before identifying which plans or annuities might be beneficial for your assets, it’s important to understand that some of these plans come with hidden fees or charges, so you must understand all of the fine print up front.
This is another area where a skilled estate planner can help you understand your options and their benefits and drawbacks.
- Creating Timelines & Managing Debt
In many instances, retirement accounts, such as IRAs and 401(k)s allow you to defer paying taxes until the money is withdrawn. Once retired, you can withdraw from these plans and pay taxes on the derived income. When it is beneficial for you to defer withdrawing, an estate planner can help you understand when the best time would be for you or your heirs to start deriving benefits from these types of accounts.
Knowing when to start can often result in significant savings, allowing more of your assets to be enjoyed by you and your surviving heirs. Properly managing debt is another crucial aspect of maximizing your transferable assets. Your heirs don’t necessarily inherit your debt, but creditors can come after your assets to cover any outstanding debts, which can reduce the value of your estate. While you are alive, it is best to create a plan for settling outstanding debts and ensure that you do not accumulate new ones.
Estate planning can be complicated, and thinking of one’s demise is never a fun activity. But what you leave behind is your legacy. And even those who have many assets might be leaving their beneficiaries a much smaller amount if they haven’t adequately planned and taken advantage of strategies for maximizing the value of the assets that they can transfer upon death.
For these reasons, you must work with an expert estate planner. The amount of money they can save your estate for your beneficiaries makes this action one of the best financial moves you can make.