by Jean Miller | Accounting News, Estate / Trust Tax - Individual, Estate Planning - Individual, News
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.
by Jean Miller | Accounting News, Estate / Trust Tax - Individual, Estate Planning - Individual, News
Both a will and a living revocable trust are valuable estate tools that transfer wealth to heirs—and both can work together to establish a complete estate plan—but what’s the difference between each, and which do you really need? We’ll go over this in the article below.
What is a Will?
A will is a written document that expresses what should happen to your property and assets after you die. As such, it becomes active upon your death. You can also appoint guardians for your children, name an executor, forgive debts, and specify how to pay your taxes.
What is a Living Revocable Trust?
Unlike a will, which becomes active after your death, a living trust kicks in immediately, and you are fully in charge of your trust while you are living. After your death, the person you appoint as the successor trustee will handle your affairs as you’ve outlined them in the document. There are also irrevocable trusts, which are generally created for tax purposes. Unlike revocable trusts, which can be changed at any time by the grantor, an irrevocable trust cannot be amended after it is established.
The Main Difference Between a Will and a Living Revocable Trust
After your death, the appointed executor of your will must work with the probate court to sort the terms of your will. This is a highly-structured process that can be drawn-out and expensive. A living trust, however, appoints a trustee to manage and distribute trust property after your death. Because the trust owns the assets and the trust hasn’t died, there is no need for probate. A living trust is a private contract between you as the grantor and the trust entity. Generally, the grantor serves as the trustee of his own revocable living trust, thus managing it during his lifetime. A successor trustee can be appointed to step in and oversee handling of the trust when the grantor dies, settling it and allocating its property to the beneficiaries named in the trust documents.
Which is Better, a Will or a Trust?
A trust simplifies the procedure of transferring an estate after your death while preventing a lengthy and possibly costly course of probate. However, if you have minor children, creating a will that names a guardian is crucial in protecting both the minors and any inheritance. The decision between a will and a trust is a personal choice, though some experts advise to have both. While a trust is typically expensive and legally complex, a will is generally less expensive and easier to establish.
Which Do You Need?
Almost everyone should have a will, but not everyone will need a living trust. If you have minor children as well as property and assets for which you would feel more settled knowing they were in a trust, then having both a will and a living revocable trust may make sense. Keep in mind that they are two separate legal documents, so one does not override the other unless issues arise, in which case a living trust will likely trump a will because a trust is its own entity.
No matter which you choose, it’s important to get your affairs in order earlier rather later. If you have minor children, establishing a will that grants guardianship should be a priority. Beyond that, making an estate plan now can save money and time later, especially for the loved ones you would be leaving behind.
