Protecting Your Estate: Essential Strategies for Estate Planning
Taxes can have a significant impact on the total worth of your estate if you fail to plan ahead. Each person’s financial situation is unique, necessitating a tailored approach to estate planning that meets their specific needs. For high-net-worth individuals and couples, the potential for a 40 percent federal estate tax on assets exceeding the federal estate tax exemption is a real concern. While the exemption for 2024 is set at $13.61 million, there is a possibility that it could revert to around $7 million by the end of 2025. This makes it crucial to take advantage of the current exemption while it lasts.
Fortunately, there are various tools available in estate planning that can help protect your assets from taxes and creditors. By setting up your estate with these protections in place, you can ensure that your assets are transferred to your desired beneficiaries when the time comes. Delaying this process may result in your estate going through probate, potentially leaving your beneficiaries with less than you had hoped for. Additionally, there is always the possibility of incapacitation, which further emphasizes the need for proactive estate planning.
Creating a Will: A Solid Foundation
The first step in estate planning is to create a will. This document serves as a starting point for a comprehensive estate plan and provides guidelines for how you want your assets to be divided among your beneficiaries. However, it is important to note that a will does not enable your assets to avoid probate. The court will need to verify the validity of the will, which can incur costs.
Reduce Your Estate Through Gifting
One effective way to ensure that your assets end up in the right hands is to make gifts while you are still alive. In 2024, you can give gifts of up to $18,000 to as many individuals as you wish, while couples can give up to $36,000 to the same person. These gifts do not count towards your lifetime gift exclusion amounts. However, it is crucial to be mindful of the limits to avoid exceeding them.
Charitable giving is another avenue to explore. You can give to charities through trusts, a will, or directly, but it is important to ensure that the charity is approved. Additionally, you can provide the required minimum distribution directly to a charity. While the Internal Revenue Service limits contributions to 60 percent of your adjusted gross income, other limits may also apply.
Create a Power of Attorney Document
Planning for the possibility of incapacitation is essential. Creating a power of attorney (POA) document ensures that your assets are entrusted to the right hands if you become unable to manage them yourself. This document appoints an individual (and a secondary) to make financial and medical decisions on your behalf. It is also possible to separate the handling of financial and medical issues between two different individuals if you prefer.
Conduct a Roth Rollover
Rolling over an IRA or a 401(k) into a Roth account can provide tax-saving benefits. While you will need to pay taxes on the amount rolled into the new account, this can help you save money on taxes in the long run. By reducing the size of your retirement accounts, you can also minimize your required minimum distributions (RMDs) and taxes. Unlike traditional retirement accounts, Roth accounts do not have RMDs, allowing your money to continue growing for as long as you wish. Furthermore, beneficiaries of a Roth account receive the money tax-free, although they must empty the account within 10 years.
Buy Life Insurance
Life insurance can be a valuable tool to ensure that each beneficiary receives an equal amount from your estate. It can also help cover significant medical costs, such as long-term care, through a rider on the insurance policy. By utilizing life insurance, you can maximize the amount you leave to your heirs without depleting other funds for unforeseen circumstances.
Include Non-Physical Assets
When preparing your estate plan, it is crucial to include assets that are not physical in nature. This includes life insurance, retirement accounts, bank accounts, stocks, cryptocurrencies, patents and copyrights, business documents, and more. Additionally, it is important to provide information on how to access these assets in a separate document, as wills become public once probate is complete.
Start a Trust
Trusts offer a versatile solution for various purposes. They can be used to provide for a disabled child, future education needs, a spouse, or as an inheritance. Trusts provide instructions and details that a will cannot. There are two main types of trusts: revocable and irrevocable. A revocable trust allows the creator to add or remove assets at any time or cancel it altogether. On the other hand, an irrevocable trust cannot be changed once established.
Creating a trust can be beneficial in reducing your tax liability by removing assets from your estate. Additionally, assets held in a trust are distributed to beneficiaries more efficiently compared to those in a will, as they bypass probate. One popular trust option for couples is a spousal lifetime access trust (SLAT). While it is irrevocable, it allows the spouse to withdraw assets when needed. However, it is important to consider potential issues that may arise if your spouse divorces or passes away, as you may no longer have access to those assets. Including appropriate clauses in the trust document can help address these concerns.
Consult an Estate Planning Attorney
While much of the estate planning process can be done online, consulting an estate planning attorney can provide valuable insights and additional asset protection strategies. They can offer guidance on protecting your assets from creditors, minimizing taxes, and addressing potential challenges to your estate plan. An estate planning attorney can help ensure that your estate plan is comprehensive, tailored to your specific needs, and legally sound.
In conclusion, estate planning is a crucial step to protect your assets and ensure that your wishes are carried out. By utilizing various strategies such as creating a will, reducing your estate through gifting, establishing a power of attorney, conducting a Roth rollover, buying life insurance, including non-physical assets, and starting a trust, you can safeguard your estate and provide for your loved ones. Consulting an estate planning attorney can further enhance the effectiveness of your estate plan and provide peace of mind for the future.