5 Estate Planning Strategies to Keep The Money in Your Family

Financial planners say you’d be wrong to think planning is only necessary for the 1 percent. The bigger issue in estate planning for the majority of people is managing the step-up in basis on inherited assets and income taxes. The step-up in basis refers to how assets such as investment property and second homes are valued and taxed after a death and how taxes are levied against traditional IRAs and 401(k)s inherited by someone other than a spouse.There are five estate planning strategies that may benefit you going forward:

Draw Up a Will 

It’s an obvious first step, but many people don’t even bother to draw up a will. Without a will, your estate must be divided in probate court, a process that could leave your beneficiaries footing a big bill. If your estate is not properly constructed, the only person that wins is the attorney.

Check Your Beneficiaries

Not all assets are disbursed through a will. Some accounts, such as retirement funds and life insurance policies, let owners name beneficiaries for that particular asset. Without a named beneficiary, an account will need to go to probate court, where a judge will decide who gets the money.

Set up a Trust

Trusts can be set up in several ways. However, 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

The biggest surprise for many people is that their traditional IRAs and 401(k)s are subject to income tax if passed to a beneficiary who is not a spouse. Many people think because they have $100,000 in an IRA, their beneficiaries are going to get $100,000. In reality, that money is subject to income tax. Currently, those taxes can be spread over the life of the beneficiary, but that might change. You can avoid leaving your beneficiaries with that tax bill by gradually converting traditional accounts to Roth accounts that have tax-free distributions.

Gift Your Money While You’re Alive

One of the best ways to ensure your money stays in the family is to simply give it to your heirs while you’re alive. The IRS allows individuals to give up to $14,000 per person per year in gifts. If you’re worried about your estate being taxable, those gifts can bring its value down. The money is also tax-free for recipients.

Complex strategies and the ever-evolving tax code can make estate planning feel intimidating. However, ignoring it can be a costly mistake for your heirs, even if you don’t have a lot of money in the bank. “Estate planning needs to happen for everybody,” Lee says.

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