In addition to thinking about how you want your assets to be distributed and who you want to include as beneficiaries of your estate, the estate planning process can help you have a say in how your assets are dispersed.
Starting the estate planning process early is wise because you can ensure that your preferences are adhered to well in advance of your death. As you plan your estate, you’ll face many decisions along the way.
Let’s explore what some of these options are and how you can address them in the most beneficial way possible.
Consider the tax situation of your estate plan
When setting up your estate, you’ll want to ensure that your plan is in a position where as little money as possible will be allocated toward taxes and court fees. To maximize what you leave behind for your beneficiaries, it’s imperative that you consider tax situations so that you can minimize the taxes your loved ones will have to pay.
Did you know that federal taxes on gifts and estates are among the highest assessed on financial transactions? While they currently are only assessed in regard to very high-worth estates, this could be a tax situation applicable to you, and laws change, so you never know.
Plus, some states have their own estate or inheritance taxes, meaning the people who inherit your money may need to pay taxes on it. That’s why it’s important to fully understand taxes as they pertain to your estate.
Read more on our blog, What To Know About Trust and Taxes.
Look into applicable rules and regulations
Estate and gift taxes have exemption limits. In other words, you can give up to a certain amount without incurring any taxes. You can also use the gift tax exemption to transfer your assets in a way that maximizes the amount that your beneficiaries receive.
Estate and inheritance taxes are often based on the value of your taxable estate. They are also usually paid prior to your assets being distributed to your beneficiaries. Think about how you can protect your assets as well as your loved ones.
One such idea is via a legal directive known as a trust. Living wills and medical or financial powers of attorney are also options.
Work with professionals to plan your estate
As you consider whom to assign the role of power of attorney to, understand that your financial well-being will be in the sole hands of that individual. They will be given the responsibility of paying bills and taxes on your behalf as well as accessing your assets and managing them for you. If you name a medical power of attorney, your life will literally be in their hands, so only elect someone whom you trust through and through.
As you set up your estate plan, you will need to carefully select people whom you trust to carry out your plan with your best interests in mind. From executors and guardians to agents and trustees, many people will play significant roles in the execution of your estate plan. So, make a point of selecting individuals who you know will ask for legal, tax, recordkeeping or investment advice as needed.
Take inventory of the factors at play
Many different factors can influence the design of your estate plan. For instance, an outright bequest or a disclaimer plan can direct all your assets to your spouse. In turn, this will grant him or her the flexibility to determine which parts of your estate plan should be held in trust when you die.
There are many strategies out there, including credit shelter trusts or marital share plans. Looking closely at your options is key because each option will either defer or limit your federal and state estate tax liability exposure.
You’ll want to look at your retirement and insurance accounts when determining your beneficiary designations. That way, you can make sure that the right people will be sure to receive payouts.
Analyze the contents of your estate, consider the tax laws that affect your situation, and understand the documents that you will need to put together. Whether that’s a will, a trust, or both, it’s important to have official documentation to ensure the proper distribution of your assets.
Also, gain an understanding as to how your assets are titled. Are they in your name alone? Or are they being held with you as a joint tenant with rights of survivorship? These are situations worth considering.
Also, if you have a large, complex estate and child care is a concern, you should think about hiring an estate attorney or asking for insight from tax professionals. The same is true if business issues or nonfamilial heirs are at play. An estate attorney or a tax professional can break down complex implications and explain them to you thoroughly.
The first steps to take when establishing an estate plan
Starting an estate plan may sound daunting, but once you get the ball rolling, momentum will move you forward. It all starts with determining what your goals and intentions are for the transfer of your wealth when you die.
Think about details regarding any concerns that you have for your beneficiaries or your assets. Come up with a list of your assets, including values and titles. Take inventory of your debts and life insurance policies as well. Print copies of any preexisting estate planning documents that you already have in place while you’re at it.
Put together a letter for your loved ones, and in that letter, write down what they need to know in order to access or locate your estate plan. Not only is it important for your loved ones to know where your assets are located, but also they should have an understanding of who your advisers are.
That way, they can reach out to the professionals who have helped you set up your estate plan, which will expedite the process on behalf of your family and friends. But before you can craft instructions regarding your estate plan and your advisers, you’ll need to understand what you want your plan to entail in the first place. As you contemplate your estate plan and how you want to distribute your assets, consider hiring an attorney or estate tax professional.
These professionals can ensure that your heirs receive your assets in ways that minimize taxes while maximizing the benefits of an estate plan. They can help you determine whether you’re on the right estate planning path for your situation, especially if you live in a state with estate and inheritance taxes.
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