It is a misconception that only the wealthy need to worry about estate planning. The rest of the population assumes that their heirs will take care of it after their time. Finance experts discourage this belief because you must minimize your estate taxes to ensure that your hard-earned money will be saved and put to good use when you need it. The motive behind estate planning is mainly maximizing the estate and not just minimizing the amount of taxes to be paid by your children.
You can keep up to 5.45 million dollars’ worth of estate before your children but they have to bother about paying taxes.
The major issue in estate planning for the majority of the population is to manage the “step-up in basis” in income tax and inherited assets. Step-up in basis denotes how homes and property investments are valued and taxes levied in comparison to the traditional individual retirement plan.
Each state will have varying levels of federal or estate tax exemptions, so you must know if your state has a lower limit or not. New Jersey has the lowest tax exemption percentage with the taxes being levied if the assets of an individual exceed $6, 75,000.
Drawing up a will is an obvious first step towards safeguarding your assets but ignored by many. According to a 2014 Rocket Lawyer survey taken of 2048 adults, 64% of Americans do not have a will and about 17% think they don’t need one. In the absence of a proper will, a probate court will be forced to divide the estate amongst your beneficiaries. If your estates are not properly planned, there will be no one who benefits except the attorney.
Estate planning and management rules vary from state to state. So you must search for an “Estate planning attorney in Long Island” if you live there or “Estate Planning attorney near me” online to get the listed attorneys.
Consulting with a financial advisor or an estate planning attorney and discussing the following strategies will help in the smooth estate planning process.
Review your Beneficiaries
It’s a surprising fact that the majority of asset owners have no named beneficiaries. Some assets such as life insurance policies, retirement funds are not generally allocated through a will. Owners of these accounts must choose beneficiaries for them. If no eligible beneficiary is named, the assets will go the custody of the court, where the judge will decide its ownership
Set up a trust fund
If you own a decent amount of estate or you don’t completely trust your heirs to be wise with the funds, you can set up a trust with an appointed trustee who can disburse your wealth.
Trust funds can be permanent/irrevocable or revocable. Permanent trusts offer the maximum tax benefits. When the money is deposited into an irrevocable trust, the trust owns the asset and the owner individually has no control over it. Due to this, the estate cannot be taxed.
Any income in the form of interest, dividends from the trust fund is taxable, sometimes high for individuals. But this in ideal option in the long run as it helps to pay a lump sum amount from a trusted source when needed rather than pulling out cash from multiple accounts.
Reduce the value of estate early
One effective way to reduce or avoid estate taxes is to begin giving away your wealth as soon as possible. The simple way to do this is by giving gifts to your loved ones periodically or donating to charitable organizations. Charitable donations are exempted under tax as well. According to Andy Schwartz of Berkley Financial group, New Jersey, an individual can give up to $14,000 a year to anyone or any organization he wishes.
Leverage on Government Exception
The US government offers every individual a lifetime exemption of $5.49 million in lifetime exception from estate taxes. Generally, this exemption is claimed at the time of death but can also be used anytime according to Schartz. In certain situations, the exemption is used to give off some asset at the present to avoid paying taxes in the future.
This is true in the case of a highly appreciating asset whose value would grow significantly over the years. The lifetime exemption can be used to gift the asset to the heirs when it is below the exemption limit so that they need not pay a heavy tax amount later on.
Buy Extra Life Insurance
Individuals who have a high net worth cannot avoid estate taxes completely but a way to reduce the amount is purchasing a life insurance policy. This reduces the tax burden on the beneficiaries after their lifetime. The estate management case doesn’t go to court and the sum assured on the insurance policy directly goes to the beneficiaries. But the key here is to buy the policy through an irrevocable life insurance trust to avoid the policy value being added to the estate pushing the tax amount much higher.
Get in touch with an estate planning attorney today and choose the best estate planning strategy that works for you and your legal heirs.