Posted on: 28 June 2021
As you build up your wealth, you will want to keep your inheritance from being reduced with estate taxes and for your heirs being hit with federal income taxes. There are steps you can take with your estate planning to reduce overall tax ramifications.
Estate Planning Tip #1: Always Have a Will
First, it is essential to have a will. A surprisingly small number of people have a will. Even if you don't feel like you don't have that many assets, it is still important to have a will. If you don't have a will, then whatever you leave behind, no matter how small or how large it is, will have to go through the probate court process. This will leave your beneficiaries with a legal bill to pay that will cut down whatever you did leave them.
Additionally, you can ensure specific pieces of property that mean something to you go to the right person with a will.
Estate Planning Tip #2: Assign Beneficiaries
Second, there are specific assets that are not disbursed through a will. Some accounts are assigned to the beneficiaries based on who is listed for that assets.
These types of assets usually include things such as retirement accounts and life insurance policies. It is essential to ensure that you have someone listed as a beneficiary on these types of accounts and that it is the right person. If your life circumstances change, be sure to change this information.
For example, you may want to change assigned beneficiaries after marriage, divorce, or having children.
Estate Planning Tip #3: Change Style of Retirement Accounts
Third, as you get older, you may want to change your retirement account types. You are going to want to take traditional retirement accounts and change them into Roth accounts. With a traditional 401(k) or an IRA, when your heirs get those funds, they can face high tax rates on that money.
By changing your retirement accounts from traditional accounts to Roth accounts, you can have tax-free distributions both for yourself and for your heirs as well. This will help save them from a significant income tax bill when they inherit this money.
Estate Planning Tip #4: Establish a Trust
Fourth, you are going to want to establish trust as well. With trust, it can be either irrevocable or permanent. It will allow you to transfer the ownership of your assets from yourself to your trust. You can control how the money is used and distributed, both when you are alive and after you pass away. With a trust, you can more easily pass on assets to your heirs without worrying about taxes, or your assets become part of the public record.
With the right estate planning, you can ensure that your assets go to your heirs and beneficiaries without incurring tax penalties and being subject to a public court process.Share