Many people assume that if they passed away, their assets would transfer to their children without much problem. However, it can be a long, complicated process.
As you build your wealth , it's essential to start planning your estate. In fact, everyone should at least have a will, no matter how much money you have, especially if you have dependents.
Estate planning can also help ensure your heirs will see more of their inheritance rather than getting eaten up by taxes. Here are 15 ways to ensure your kids actually get your money after you die.
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1. Transfer assets while you’re still alive
Why wait until death? Consider handing down assets to your heirs while you’re still alive. You can gift up to $17,000 per year per child completely tax-free as of 2023, according to the IRS.
This way, you can avoid estate taxes and see the difference your money makes in the lives of your loved ones. If you take this route, you might advise your children to save money in a high-yield savings account .
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Estate planning can be challenging, especially if illiquid assets are involved, such as a business or family farm.
A board-certified estate planning attorney can help you prepare necessary legal documents and minimize estate taxes and probate costs.
Knowing that your estate plan is well-crafted and legally sound provides peace of mind for both you and your loved ones.
3. Create a will
A will, formerly known as a "last will and testament," is a critical part of an estate plan.
It's a legal document that outlines how you want your assets distributed and who should care for your minor children if you pass away.
If you don't have a will, a probate judge will decide the division of your estate, and it might not be distributed as you would have wanted.
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In your will, you can name an executor to oversee the management of your estate, pay off debts , and distribute assets to your heirs. They may also need to handle legal and administrative tasks required to settle your estate.
You should name someone who is organized and can handle the role's responsibilities. It's also crucial that you trust them completely to act in the best interests of your estate.
5. Assign a durable power of attorney
A power of attorney assigns an agent or attorney-in-fact to make financial and medical decisions on your behalf. A durable power of attorney remains in effect even if you're incapacitated and can't manage your own affairs.
Without one, if you have a physical or mental condition and can no longer manage your finances, these critical decisions may be left up to the state.
6. Name beneficiaries
Probate can be a long, costly process.
Luckily, you can often bypass it entirely by naming beneficiaries for retirement accounts, life insurance policies, and some bank accounts. When you pass away, these accounts transfer directly to the named beneficiaries.
Many states also recognize a beneficiary deed, so your property will transfer on death.
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Joint bank accounts typically have a "right of survivorship," meaning if you pass away, the account automatically transfers to the surviving account holder(s) without going through probate.
As with choosing an executor for your estate, naming a reliable person as a joint account holder is important. All joint account holders have equal ownership and control over the money, which may lead to family disputes.
8. Establish a trust
A trust is an excellent way to keep assets out of probate court and avoid estate taxes.
If you're worried your children may not use your money responsibly, you can set conditions, such as specifying that the trustee must use it for education, a wedding, or a house.
Irrevocable trusts typically offer the most tax advantages, but once you transfer money to the trust, you can't get it back.
9. Designate a guardian for minors
Designating a guardian for minors in your estate plan is an essential step to ensuring your children get the care and financial support they need if something happens to you.
A guardian is responsible for the well-being of your children if you die or are incapacitated. Your estate plan can also specify how your guardian should manage your assets for your children.
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10. Write a letter of intent
A letter of intent is not considered a legal document. It’s simply a letter written to your beneficiaries or executor. However, it may help a probate judge understand your preferences for your estate.
In a letter of intent, you can convey your thoughts and intentions about your estate plan in a more personal way. You can also specify funeral directions and how you'd like your assets used.
11. Pay off debt
When you pass away with outstanding debt, creditors have a legal right to seek repayment from your estate before any assets are passed on to your heirs.
Debts from personal loans, credit cards, mortgages, and medical bills can reduce the amount of your heirs’ inheritance. In some cases, the estate executor may need to sell assets that you intended to leave to your loved ones to settle debt.
12. Get a life insurance policy
When you sign up for life insurance, you pay regular premiums for the promise that the insurance company will pay out the death benefit to your beneficiaries when you die.
A life insurance policy is a safety net to replace the income you would have provided your family if you were still alive. It’s especially important if you have minor children.
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13. Convert retirement accounts to Roth accounts
If you have a 401(k) or traditional IRA, your heirs will need to pay income tax when they withdraw inherited funds from traditional retirement accounts.
To save money on taxes, consider converting these accounts into Roth accounts. Although you will pay income tax to convert the account, there will be no taxes when your heirs make withdrawals.
14. Communicate your plan to your loved ones
Once you have a plan assembled, you should discuss your intentions for your estate with your loved ones.
A simple conversation can manage people's expectations about their inheritance after your death. It ensures that your wishes are understood and may prevent hurt feelings and animosity between heirs after you're gone.
15. Regularly review your estate plan
Circumstances change, so you should regularly review your estate plan every few years to ensure it's still in line with your wishes.
As you grow your wealth, or if it decreases, it may be necessary to reassess your tax planning and wealth distribution. You should also review your estate plan after major life events, changes in health, or switching attorneys or financial advisors.
Bottom line
Estate planning is crucial, especially as your assets increase. A solid estate plan can ensure your hard-earned money goes to the right people.
In addition to having an estate plan, you should try to get out of debt before or during retirement. Otherwise, your estate will be reduced to pay creditors.
Having a plan in place for your estate is the best way to save your friends and family time, money, and stress during their time of grief.
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