5 Estate Planning Tips To Make Sure Your “Stuff” Goes To The Right People

The prospect of estate planning can seem overwhelming, but don’t put it off. Having an estate plan is crucial to ensuring your money and assets go to your intended heirs. Here are some estate planning tips to get you started.

  • 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.

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.

It’s an obvious first step, but many people don’t even bother to draw up a will. In fact, only about 33% of people say they have a will, according to the 2021 Estate Planning and Wills Study that surveyed 2,500 Americans, published by Caring.com. Of those who don’t have a will, 34% say it’s because they haven’t gotten around to it.

Without a will, your estate will be divided in probate court, meaning someone else decides who gets your money. Having a will won’t mean your heirs avoid probate though. They still need to go through the court system to have the will reviewed and confirmed as valid.

Check Your Beneficiaries

One way to avoid probate court is to have beneficiaries named for your assets. Some accounts, such as retirement funds and life insurance policies, let owners name beneficiaries who will receive that particular asset.

Since a beneficiary 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.

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.

Convert Traditional Retirement Accounts to Roth Accounts

Those with traditional 401(k) or IRA accounts could inadvertently leave their heirs a big tax bill. 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. 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

You might not have to worry about estate tax planning if you simply give away your money while you’re alive. As of 2021, the IRS allows individuals to give up to $15,000 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.

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.

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.

Does your estate plan include The Library Foundation? Would you like to? Contact Erin today to discuss how a gift to the Library could be included in your plan. Send us a message at Foundation@tscpl.org

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