You need an estate plan whether you have $20,000 or $2 million in the bank.
Many people believe estate planning or having a will is only for the wealthy, but this isn’t the case.
Even people with small resources should strive to ensure that their property and assets pass to their chosen successors rather than the government’s.
A will is also necessary for families with minor children since it can determine who gets custody if both parents die simultaneously.
When you don’t have an estate plan, it means that your heirs will have to go to a probate court and it’s the court that will decide how the property will be distributed. You don’t want this to happen, do you?
The best way to ensure that your heirs end up in court you need to do a number of things that include:
Work with experienced attorneys
Estate laws differ from state to state. As a result, it is prudent to obtain the counsel of a local, knowledgeable estate planning lawyer. This is especially vital if you have a substantial estate or a complicated financial situation.
Besides an attorney, you also should get an accountant with enough knowledge in taxation.
Working with the proper professionals not only guarantees that all of your paperwork will be accurately produced, but they may also help you identify issues that might be a problem in the future.
Estates with many illiquid assets, for example, have the potential to cause problems for heirs.
Estates containing family farms, businesses, or other property that cannot be easily divided fall into this category. While one successor may prefer to maintain the asset, others may prefer to cash out their share.
An expert estate attorney will help analyze opportunities for injecting capital into an otherwise illiquid estate, thus avoiding conflicts.
Draw up a will.
Writing a will is the most fundamental estate planning strategy. This document specifies how your assets will be split after your death and can be used to specify whom you wish to have custody of any minor children.
The challenge with this is half the adults don’t have a will. That could be because people don’t want to think about dying or are unsure how to share their possessions.
If you die, your estate without a will, your property will be divided in probate court. This means that someone else will decide who receives your money.
Thankfully, drawing a will will prevent this from happening. While doing this will keep the court from determining the trajectory of your estate, remember that even estates with wills must go through the legal system.
This is meant to review and approve the will’s validity.
Set up a trust.
If you have a large inheritance or are concerned that your heirs will mismanage it, you can set up a trust and choose a trustee to transfer your riches. This method also prevents your assets from becoming entangled in litigation.
You completely avoid the need to probate a will when you have a trust in place.
Besides giving you peace of mind that your property won’t be damaged, a trust gives you plenty of tax advantages. When money is placed in an irrevocable trust, you no longer own the assets. They are the property of the trust.
Due to this, the funds are exempt from estate taxes. While a trustee ultimately controls the money, you can choose how it will be used, and money can be distributed from a trust while you are still living.
Someone you know directly, such as a friend or family member, can serve as trustee. You can hire corporate trustees if you don’t know anyone prepared to take on this responsibility.
Because trusts are complicated, you should work with an experienced estate attorney to understand how to form one that matches your needs.
Check with your beneficiaries.
Having beneficiaries identified for each of your assets is one approach to avoid probate court. Some accounts, such as retirement savings and life insurance policies, allow you to choose beneficiaries via their online account.
Some states have beneficiary deeds, which allow you to transfer property to someone else upon death easily. You can set up other accounts with transfer-on-death clauses, and this is the cheapest and easiest option to distribute assets to your heirs.
Because a beneficiary or TOD designation takes precedence over anything specified in a will, examining beneficiary information following each major life change, such as the birth of children, marriage, or divorce, is good.
Convert traditional retirement accounts into Roth accounts
You may unintentionally leave your heirs with a large tax burden if you have normal 401(k) or IRA accounts. This is because payouts from all traditional retirement accounts are subject to normal income tax.
Nonspousal heirs, such as children, had the option in the past to spread those payouts across their lifetime, effectively lowering the overall taxes due.
Heirs who are not spouses must now remove all funds from an account within 10 years. If the account balance is considerable, significant distributions may be required, which may be taxed at a higher rate.
If you want to transmit money to heirs tax-free, you can do so by converting standard accounts to Roth accounts because Roth structures are nice for heirs.
The converted amount is subject to standard income taxes, but withdrawals are tax-free if made by you or your heirs. Furthermore, with tax rates reaching historic lows, paying taxes now rather than later may be preferable.
Gift your money wisely while you are alive.
If you give your money away while still living, you might not have to worry about estate taxes and probate courts.
Even if you don’t need the tax advantages, giving gifts while still living allows you to observe how the property changes the lives of your loved ones.
When gifting, be cautious about transferring assets that appreciate, such as stocks or a home, because they receive a step-up in basis when included in an estate.
As a result, the taxable amount of an asset is changed following the owner’s death, therefore it may be advantageous to transfer some assets after death rather than before. For peace of mind you are doing the right thing, consult with a tax professional.
Charitable contributions are another strategy to lower the value of your estate. Instead of making a one-time donation, consider establishing a donor-advised fund.
This option allows you to receive an immediate tax deduction for money invested in the fund and make charitable contributions over time. You can appoint a child or grandchild as a successor in charge of the money.
When creating a fund, ensure the documents are in order. This requires you to draft the documents with your estate planning attorney Largo.