Contrary to popular belief, estate planning isn’t just for the wealthy. Your estate includes everything you own, and it’s worth taking the time to plan for what will happen to it. Below we’ll go over steps you can take to be sure your money and assets are kept safe from unwanted surprises, like excessive taxes and unintended heirs.
Create a Will
This may seem like an obvious step, but according to a recent study published by Caring.com, only 33% of the 2,500 Americans who were surveyed said they have a will. If you don’t have a will, your estate goes to probate court—a process whereby state laws determine how your estate will be divvied up and to whom your assets will go. It’s a time-consuming and expensive process. To be clear, even with an established will, your heirs will still need to go through the court system in order to confirm the validity of the will.
Specify Your Beneficiaries
Name beneficiaries for your assets if you want to avoid probate court. Check to see if certain accounts like retirement funds and life insurance policies will allow you to designate beneficiaries for that specific asset. Some accounts will even permit transfer-on-death (TOD) provisions, which is a hassle-free way to pass assets to heirs. You can also check if your state allows beneficiary deeds, which allow property to be automatically transferred to a new owner when the current owner dies, without the requirement to go through probate.
It’s important to note that a beneficiary or TOD specification tops a will, so be sure to review beneficiary information after every milestone event (i.e., marriage, divorce, birth of a child).
Set Up a Trust
Trusts are established in order to control distributions from the estate to the surviving spouse and children, and to assure that assets are used in a way in which the person setting up the trust feels suitable. If you hold your property in a trust, your heirs won’t be required to go through a probate court.
- Revocable living trust: You can assign parts of your estate to go toward certain things while you’re alive, and you can modify the trust after it’s created. If you fall ill or become incapacitated, your chosen trustee can take over. Upon your death, the trust assets transfer to your designated beneficiaries.
- Irrevocable trust: You cannot modify the trust after it’s created, but irrevocable trusts offer tax shelters that revocable trusts do not.
Reduce Taxes with a Roth Account
Because regular income tax must be paid on distributions from all traditional retirement accounts, those with traditional 401(k) or IRA accounts could unwittingly leave their heirs a hefty tax bill. Converting those accounts to Roth accounts can help to reduce taxes considerably for heirs. While a Roth’s converted amount is subject to regular income taxes, withdrawals—whether by you or your heirs—are tax free.
Gift Your Money While You’re Still Living
As of 2021, the IRS permits individuals to gift up to $15,000 per person per year. If you’re looking to bypass estate taxes, gifting can bring the value of your estate down. The money is also tax-free for recipients. Just be careful not to give away assets that appreciate in value. The taxable amount of these assets, such as stocks or a house, is adjusted upon the owner’s death. Therefore, it may be favorable to transfer certain assets after death rather than before.
