Maximizing your beneficiaries’ benefits with estate planning

On Behalf of | May 12, 2021 | Estate Planning |

Most people want their families to receive as much of their wealth as possible after they die. Some people might think that since their estates are below the federal exemption amount of $11.58 million for estate taxes that they do not need to worry about creating a trust. However, when a person dies without a trust, the estate may end up in probate court. The probate process is lengthy and expensive. Here are some ways to preserve as much wealth as possible within your family.

Take advantage of Roth IRAs and lifetime gifts

If you have a substantial sum saved in your IRA or 401(k), your loved ones might face a large federal income tax bill after you die. Balances of IRAs and 401(k)s must be distributed within 10 years of death. Receiving a large sum of money can easily push a family member into a much higher tax bracket and force him or her to pay a substantial amount in taxes.

IRAs and 401(k)s include pre-tax dollars, so the funds are taxed when they are distributed. By converting these accounts to Roth IRAs slowly over time, you can help to prevent this large tax bite. Another way to reduce the size of your estate while keeping money with your family members is to give money to your family members while you are still alive. You can give up to $15,000 per family member per year. This might help if your estate is large to reduce its value below the federal exemption threshold.

Trusts and beneficiaries

Creating a trust can provide a way for your assets to be transferred to your family members outside of the probate process. They allow you to direct how your estate will be managed for your minor or young adult children. They can also be established to prevent spendthrift family members from wasting their inheritances or to shield funds from the potential reach of creditors. Since life insurance and retirement accounts pass outside of probate, it is also important to review the beneficiaries and keep them updated so that your money goes to the people you want to receive it.

Meeting with an estate planning attorney might help people to determine how to best protect the family’s wealth. A lawyer may advise his or her clients about the types of estate planning documents that might best help to meet their goals.

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