How Do I Keep Money in the Family?

That seems like an awfully large amount of money. You might think only the super wealthy need to worry about estate planning, but you'd be wrong to think planning is only necessary for the 1%.

US News and World Report’s recent article entitled “5 Estate Planning Tips to Keep Your Money in the Family” reminds us that estate taxes may be only part of it. In many cases, there are income tax ramifications.

Your heirs may have to pay federal income taxes on retirement accounts. Some states also have their own estate taxes. You also want to make certain that your assets are transferred to the right people. Speaking with an experienced estate planning attorney is the best way to sort through complex issues surrounding estate planning. Here are some things you should cover:

Create a Will. This is a basic first step. However, 68% of Americans don’t take it. Many of those who don't have a will (about a third) say it's because they don't have enough assets to make it worthwhile. This is not true. Without a will, your estate is governed by state law and will be divided in probate court. Ask an experienced estate planning attorney to help you draft a will.  You should also review it on a regular basis because laws and family situations can change.

Review Your Beneficiaries. There are specific types of accounts, like retirement funds and life insurance in which the owners designate the beneficiaries, rather than this asset passing via the will. The named beneficiaries will also supersede any directions for the accounts in your will. Like your will, review your account beneficiaries after any major life change.

Consider a Trust. Ask an experienced estate planning attorney about a trust for possible tax benefits and the ability to control when a beneficiary gets their money (after they graduate college or only for a first home, for example). If money is put in an irrevocable trust, the assets no longer belong to you. Instead, they belong to the trust. That money can’t be subject to estate taxes. In addition, a trust isn't subject to probate, which keeps it private.

Convert to Roth’s. If you have a traditional 401(k) or IRA account, it might unintentionally create a hefty tax bill for your heirs. When your children inherit an IRA, they inherit the income tax liability that goes with it. Regular income tax must be paid on distributions from all traditional retirement accounts. In the past, non-spousal heirs, such as children could “stretch” those distributions over their lifetime to reduce the total amount of taxes due. However, now the account must be completely liquidated within 10 years after the death of the owner. If the account balance is substantial, it could necessitate major distributions that may be taxed at a higher rate. To avoid leaving beneficiaries with a large tax bill, you can gradually convert traditional accounts to Roth accounts that have tax-free distributions. The amount converted will be taxable on your income taxes, so the objective is to limit each year's conversion, so it doesn't move you into a higher tax bracket.

Make Gifts While You’re Alive. A great way to make certain that your money stays in the family, is to just give it to your heirs while you're alive. The IRS allows individuals to give up to $15,000 per person per year in gifts. If you're concerned about your estate being taxable, these gifts can decrease its value, and the money is tax-free for recipients.

Charitable Donations. You can also reduce your estate value, by making charitable donations. Ask an experienced estate planning attorney about setting up a donor-advised fund, instead of making a one-time gift. This would give you an immediate tax deduction for money deposited in the fund and then let you make charitable grants over time. You could designate a child or grandchild as a successor in managing the fund.

Complicated strategies and a constantly changing tax code can make estate planning feel intimidating. However, ignoring it can be a costly mistake for your heirs. Talk to an estate planning attorney.

Reference:  US News and World Report (Sep. 30, 2020) “5 Estate Planning Tips to Keep Your Money in the Family”