Estate planning can help you manage your assets throughout your lifetime while also minimizing taxes and legal problems for your beneficiaries after your death.
Wills to transfer assets after death, trusts to manage assets for beneficiaries, and powers of attorney to select someone to make financial and healthcare decisions on your behalf are common components of comprehensive planning. If you want to construct an estate plan, a financial advisor may lead you through specific techniques based on your needs and objectives.
Estate Planning Basics: Estate planning allows you to specify who will inherit your assets. This eliminates potential conflicts and gives financial security for your loved ones by resolving how debts and taxes will be handled. It also helps protect your assets from costly legal fees and delays in the probate procedure. Estate planning includes preparing a will, establishing trusts, and appointing beneficiaries.
A will specifies how assets will be dispersed, whereas trusts provide greater control over the distribution process. Designating beneficiaries for accounts such as life insurance might also help you avoid probate and deliver assets directly to your intended recipients. Here are nine popular estate planning techniques to assist you decide how to manage and transfer your assets.
1. Create a Will. A will is an essential document in estate planning. It describes how assets will be allocated and can help to avoid legal disputes amongst heirs. Without a will, state rules decide asset distribution, which may conflict with personal intentions. A will may also be used to name a legal guardian for small children.
2. Annual Gifting. Annual gifting allows you to transfer riches to loved ones while avoiding gift taxes. Each year, you can gift up to a set amount per person - $18,000 in 2024 - to reduce the size of your estate. This technique can help you manage estate taxes and provide for family members during your lifetime. 3. Form a Spousal Lifetime Access Trust (SLAT).
A spousal lifetime access trust (SLAT) is an irrevocable trust that is intended to benefit your spouse while potentially eliminating assets from your taxable inheritance. It enables one spouse to make a donation to the trust, which the other spouse can use throughout their lives. This technique can offer financial security to the beneficiary spouse while potentially lowering estate taxes.
4. Keep Step-Up in Basis With a Revocable Trust. A step-up in basis reduces taxes by adjusting the value of an inherited asset to its market value at the time of death. Unlike an irrevocable trust, a revocable trust can protect the step-up in basis by retaining the assets in the person's taxable estate until they are transferred to beneficiaries.
This means that beneficiaries inherit assets based on their current market value rather than the original purchase price. This method can dramatically reduce capital gains taxes when the assets are subsequently sold.
5. Consider a Generation-Skipping Trust. A generation-skipping trust (GST) transfers wealth directly to grandchildren, bypassing the grantor's children.
This can help reduce estate taxes that would otherwise be imposed if assets were transmitted through each generational level.
It enables the grantor to provide for grandchildren while keeping the assets safe from creditors and prospective divorce settlements.
Source: SmartAsset.com