One of the biggest estate-planning mistakes you can make comes from a common misconception: Estate planning is just for the wealthy. It's not.
It's true that in 2023, a filing is required for estates with combined gross assets and prior taxable gifts exceeding $12.9 million (see the full IRS rule). That's the threshold that beckons the tax man.
But even if you don't meet the estate tax threshold, failing to make an estate plan means that after your death, your money and other possessions could sit on the sidelines while fees and court costs eat away at your assets. Bottom line: Everyone should take up some degree of estate planning.
First, let's determine just what we're talking about. Estate planning can mean putting together everything from a will and a health care directive to life insurance, naming guardians, and figuring out who gets your cash. Even things as simple as selling your car or paying your credit cards can become a long, expensive hassle for those you leave behind.
Your first step is determining beneficiaries (including charities) for your insurance and retirement accounts. Just remember to track, and if necessary, update, your beneficiaries so you don't end up sending a fat insurance check or a hefty IRA payout to an ex-spouse or, if the beneficiary has died, to probate court.
Your will gets reviewed by probate court, becomes public, can be legally challenged by disgruntled relatives, and generally takes more time and money than you may have banked on before it gets where you intended.
And that introduces a little irony that's one of the first rules of estate planning: Many estate planners recommend keeping as much as possible out of your estate.
One way to give now is to make gifts of your assets while you're still alive. For 2023, you can give up to $17,000 annually to anyone without incurring a gift tax. If you and your spouse team up, that's $34,000.
And rather than leaving $100,000 for a grandchild's college education, you can make contributions to a 529 college savings plan, which can lower your tax bill. Keep in mind that if the child's parents set up the plan, they qualify for the tax treatment. Only the creators of the account (whether the grandparents or any other party) get the tax break. Note that each child can be the beneficiary of more than one account.
You can front-load up to five years of 529 contributions—$85,000 in 2023 per child, per individual contributor or $170,000 for couples filing jointly—without hitting IRS gift-tax rules. Please check your individual plan rules for more details.*
Under lock and key
Trusts are another tool that can potentially keep your assets away from probate and taxes. To get a tax break, though, you'll need to keep assets in an irrevocable trust. That means you give up control but not necessarily the benefits.
One consideration is a qualified personal residence trust, where you put your home into a trust for whomever you designate. This lets you stay in the home if you pay rent. If you put the home in a trust for a family member and then pay that family member rent, you'll be passing on additional cash outside of your estate. You'll need to consult a tax or financial planner to determine if such a trust makes sense for your situation.
Yet another tactic is a life estate. You donate your house to a charity now but continue to live in it for the rest of your life. After you die, the property goes to the charity, which can use it or sell it. This brings two benefits: It gives you a tax deduction while you're alive, and it keeps the property out of your estate, reducing your estate's taxable value.
For the cause
Another challenge lies in balancing your family's unknown future financial needs and your desire to benefit those charities near and dear to your heart.
One approach is a charitable remainder trust, which is tax exempt and irrevocable. The trust actually buys an insurance policy on you (and your spouse, if you choose) equal to the size of your gift, naming your family members as beneficiaries. The trust pays the insurance premiums, and your family gets the income from the policy. Then, after the established period of payouts has passed, the remaining assets go to the assigned charity.
There are, of course, costs associated with the setup and maintenance of all these plans. But if you end up preserving more of your estate in the long run, it could be well worth it. Start by visiting an experienced estate lawyer to create a will, a health care proxy, and other basics. Then move on to an experienced financial planner, insurance expert, and estate or tax attorney. This team can show you how tax shelters, trusts, and insurance can give you ideas and alternatives now (and maybe tax benefits too). They'll help ensure your concerns are covered while keeping your heirs' tax hassles to a minimum.
More than just an asset giveaway
Estate planning isn't just about giving away your assets. It can also help you set goals concerning what you want financially and personally in life. And beyond that, it can give you a chance to see your heirs or favorite charities benefit from some of your assets while you're still enjoying your own retirement.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
*As with any investment, it's possible to lose money by investing in a 529 or other educational savings plan.
Investors should consider, before investing, whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available in such state's qualified tuition program.
By investing in a 529 plan outside of your state, you may lose tax benefits offered by your own state's plan. State tax treatment of earnings may vary.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.0223-3HYV