If you are not prepared in advance, taxes could potentially diminish the total value of your estate. Everyone’s financial situation is unique, so you need a tailored estate plan to meet your specific needs.
High-net-worth individuals and couples may face a 40% federal estate tax on amounts exceeding the federal estate tax exemption. The exemption amount for 2024 is $13.61 million, but it may revert to around $7 million by the end of 2025. So, it is imperative to take advantage of it now.
Estate planning offers various tools to shield your assets from taxes and creditors. Setting up these protections for your estate promptly ensures that your assets are transferred to your designated beneficiaries when the time is right. Delaying too long could mean that your passing will lead to probate, resulting in your beneficiaries receiving significantly less wealth than anticipated. Additionally, you may risk losing capacity to act.
Upon listing all assets, the first thing you should do is establish a will. You can do this online or with the assistance of an estate planning attorney. This document serves as a foundational element of a comprehensive estate plan.
A will provides guidance to your beneficiaries on how you wish to distribute your assets. Remember, a will does not protect your assets from probate. The court needs to validate its validity, which incurs fees.
One of the best ways to ensure some of your assets pass into the right hands is through gifting while you are alive. As of 2024, you can gift up to $18,000 to an unlimited number of individuals. Couples can gift up to $36,000 to the same person. These gifts do not count against your lifetime gift exclusion amount, but exceeding the limit can have an impact.
You can also gift by paying for others’ medical or educational expenses. Donations must be made directly to institutions, not individuals. These gifts do not count as part of your estate gift exclusion.
Charitable giving is another option that can be carried out in various ways. Donations to charities can be made through trusts, wills, or direct methods, subject to approval by the charitable organization. You can also provide the required minimum distribution directly to the charity. The IRS limits contributions to 60% of adjusted gross income, with other restrictions possibly applying.
Establishing power of attorney (POA) documents ensures that your assets fall into the right hands should you lose capacity to act. This document designates a person (and an alternate) to act on your behalf regarding financial and medical decisions should you become unable to direct them. If desired, you can appoint separate individuals for financial and medical matters.
POA documents can also be durable, meaning the designated person retains authority after you lose capacity. Some states permit enduring POA, as stated by the National Aging Committee, which only comes into effect after you lose capacity.
Rolling over an IRA or 401(k) to a Roth account can help save on taxes. Funds transferred to the new account are taxed, enabling tax savings in the future. This reduces the size of your retirement account, making your required minimum distributions (RMDs) and taxes smaller.
Roth accounts do not have RMDs. You can let the money grow in the account as long as you wish. Should the need arise, you can leave it there, withdraw for special purchases or vacations, or pass it on to your beneficiaries.
Beneficiaries of Roth accounts must withdraw the funds within 10 years. The good news is they receive the funds tax-free.
If your estate cannot provide each beneficiary with an equal amount, you can bridge the gap using life insurance. It can also cover potential hefty medical expenses, like long-term care covered by additional insurance on the policy. This helps ensure you give as much as possible to your heirs without tapping into other funds due to illness or passing away.
When preparing your estate plan, incorporate non-tangible assets. These may include life insurance, retirement accounts, bank accounts, stocks, cryptocurrency, patents and copyrights, business documents, among others. Additionally, include information on how to access them in separate documents, as they become public after probate.
Trusts are versatile tools that can serve various purposes. They can be used to support disabled children, future education needs, a spouse, or as an inheritance. Trusts offer explanations and details not provided by wills.
There are two types of trusts, revocable and irrevocable. A revocable trust permits the creator to add or remove assets or revoke it at any time. An irrevocable trust cannot be altered once established.
Creating a trust is beneficial as it extracts assets from your estate, reducing your tax liability. Assets pass to your beneficiaries quicker through trusts than through wills due to probate.
An example of a trust created for many couples is a Spousal Lifetime Access Trust (SLAT). It is irrevocable but allows you to designate your spouse as one of the beneficiaries. This enables your spouse to access assets when needed. Your spouse can also establish a beneficiary who designates you as the recipient.
A potential issue with this trust is that if you divorce or your spouse passes away, you may no longer have access to those assets. However, you can include clauses in the trust document to address this possibility.
While much of estate planning can be done online, consulting with an estate planning attorney can provide additional asset protection strategies. They offer various methods to safeguard your assets from creditors, taxes, and those who may challenge your documents.
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