As 2021 wraps up, it’s a good time to start looking at your estate planning. No matter how much your income is or how many assets you own, it’s important to take the time to do estate planning. Estate planning is the process of deciding who will receive your assets and be in control of your responsibilities if you are incapacitated or after you pass. Continue reading to learn what you need to know about estate planning and taxes.

The biggest goal of estate planning is to ensure your beneficiaries receive your assets with minimized estate taxes, gift taxes, income taxes, and additional taxes that could be incurred. There are a few basic steps to estate planning:

1. Take inventory of your assets

You have to start with listing your tangible and intangible assets. Your tangible assets could include your home, land you own, vehicles, collectibles, antiques, and other physical possessions that are important to you. Intangible assets can include checking & savings accounts, stocks, bonds, mutual funds, life insurance policies, retirement plans, health savings accounts, and any ownership in businesses. Once you have your inventory of all of your assets, you need to estimate their value. For some assets, you can do your appraisals or statements of the accounts.

2. Understand your family’s needs

Make sure that your assets and family will be protected after you’re gone. Determine if you have enough life insurance to take care of your family. This depends on several factors, including if your spouse is still alive, how many children who have, if you have grandchildren that need extra help, etc. If you have young children, name a guardian that will be able to take care of them. Make sure that you discuss this with the person who wants to name a guardian to ensure that they are willing and able to care for your children.

3. Put directives in place

You’ll need several directives in place to complete your estate plan:

  • A trust. Having a revocable living trust gives you the ability to direct portions of your estate to go toward certain expenses while you’re alive. Your selected trustee will be able to take over if you become incapacitated. After you pass, your trust will transfer to your beneficiaries which spares them from having to go through probate court.
  • A medical care directive. A living will can document your wishes for medical care if you become unable to make those wishes yourself.
  • A financial power of attorney. This gives someone of your choosing the ability to make your financial affairs if you become unable to. This includes paying your bills and accessing your assets.
  • A limited power of attorney. This makes limits on the powers your representative is given. Instead of having complete access, they have the ability to only perform certain tasks on your behalf.

4. Check your beneficiaries

While you may have a will that lists your beneficiaries, you need to make sure it’s clear on all of your accounts who receives what. To start, look at your retirement and insurance accounts, make sure all beneficiaries are up to date, don’t leave any beneficiaries blank, and name backup beneficiaries.

5. Understand estate tax laws

Once you pass away, your estate is subject to estate taxes and inheritance taxes that vary depending on where you live and how much your estate is worth. For tax reasons, federal and state estate taxes are based on the fair market value of the estate. For federal estate taxes, different rates are based on the taxable amount of the estate, which includes gross assets combined with prior taxable gifts. Some states do not have an estate tax or an inheritance tax, but the state estate tax is based on where the person who held the estate lived when they passed away. The taxes for this are usually assessed on a sliding basis, similar to income tax brackets.

A few ways to lower the tax burden on your beneficiaries are gifting money while you are still alive, converting traditional retirement accounts into Roth accounts, and setting up trusts.

6. Receive professional help

If you need assistance with setting up a tax advantaged estate plan, our advisors at Mooney Lyons can help. We will be able to walk you through the process and make sure you have a strong estate plan that will take care of you and your family. Contact us today to get started!

Sources:

https://www.investopedia.com/articles/personal-finance/120715/estate-taxes-who-pays-what-and-how-much.asp

https://money.usnews.com/money/personal-finance/articles/estate-planning-tips-to-keep-your-money-in-the-family

https://www.nerdwallet.com/article/investing/estate-planning