5 Things You Should Know about Estate Planning
Even if you’re not leaving millions of dollars for others to inherit, the assets you have accumulated during your lifetime can get passed along to your heirs. That can be a welcome windfall or necessary income for your loved ones. However, if you don’t hire an expert in estate planning, your beneficiaries may end up spending more money on taxes than you had planned. Fortunately, it’s not too late to act now.
1. How to Preserve More Money for Your Heirs
The goal of estate planning is to preserve more money for your heirs. After you have worked hard to accumulate assets, you want to give them away to the people you love instead of seeing it all going to taxes. Of course, you can’t get around paying taxes entirely, but there are things you can do to minimize the burden and transfer the assets where they need to go.
For example, you can take advantage of the annual gift tax exemption right now and start giving your inheritance away. There’s also the option to set up custodial accounts for minor children or fund their college tuition with a tax-free gift. For more tips on preserving more money for your heirs, you should schedule an appointment with your tax accountant.
2. Beneficiaries Pay Taxes
When you leave an inheritance to your children or other close family members, you may only be thinking about the windfall they’re going to receive. However, when you leave someone sizeable assets, there will be repercussions from a tax standpoint. Unfortunately, in many cases, the beneficiaries don’t even realize that an inheritance is considered taxable income.
Of course, not everyone pays full taxes on their inheritance. And in most cases, an experienced accountant can reduce the taxable burden for the beneficiaries with proper estate planning. Hiring an experienced CPA can actually save you money. And wouldn’t you rather have the money you worked so hard for go to your children or to worthy causes than the IRS?
3. You Can Change Your Mind
Whether you write a will or go through estate planning with an accountant, many people are concerned about the finality of these actions. Technically, you can change your mind any time you want, because it’s your money to give away. While it can take some time to set up the accounts in a way to reduce the tax burden your heirs face, you can make changes anytime. You can even decide to take all the money and do something outrageous with it instead of leaving an inheritance for someone else. Then again, you could also decide to let the money grow and donate it to the charities of your choice.
4. You’re in Control
Many people worry about leaving their loved ones an inheritance and making their lives more complicated as a result. It can certainly be tempting for someone to blow through a big sum of money in a short amount of time. Fortunately, you can stay in control of the finances even beyond the grave. This is especially beneficial if your beneficiaries are underage, but it can also be useful for curbing spending and knowing that your loved ones are taken care of even when you’re not around to make sure.
For example, if you choose to have the money distributed in an annuity, your beneficiaries will receive money on an annual basis for a certain number of years. Of course, if you do set up an annuity, you must discuss the tax implications with your account. Otherwise, it’s quite possible that your beneficiary is required to pay taxes on any untaxed growth when they file their return, and they probably won’t appreciate that as much.
5. What Happens to Your IRA?
When your children inherit your IRA, they’ll be required to pay taxes on withdrawals. They may lose a sizable portion of the money to taxes and penalties if they’re not careful. Your children will be required to take minimum distributions from the IRA, too. Of course, they may be tempted to cash in the entire account at once to splurge on a new car, but that’s probably not the best option from a tax standpoint. It’s important to discuss these ramifications in detail with your tax accountant, because improper planning will be costly.
Finally, it’s important that your beneficiaries understand the ramifications of your inheritance. Therefore, you should probably schedule a time to discuss it with them after you have completed your estate planning with your accountant.
Camputaro and Associates
Certified Public Accounting Firm
136 N. Orchard Street, Suite 8
Ormond Beach, FL 32174