Estate Planning For Dummies

At some point, all of us will have to do some type of estate planning (unless of course, a technological singularity means that we get to live forever) - and it’s never too early to start thinking about it. There’s a perception out there that estate planning is only something the rich have to worry about. However, even if your estate is small, you still might want to consider who gets what. After all, tax issues can mount up quickly without significant planning.

Offset Taxes With Insurance

The beneficiaries of your assets can end up losing a lot of money when they receive inheritance assets, thanks to estate and income taxes. However, many of these losses can be offset by having life insurance in place.

To understand how, consider the following example. Suppose that your estate planning attorney estimates that you owe more than $200,000 in income and property taxes. All you need to do is purchase life insurance to cover than amount to be paid to whoever is going to receive your assets. This will ensure that they receive the full value, despite the government taking a cut since life insurance proceeds are tax-free.

Declare Who Gets What

Most people just assume that if they don’t write a will, then their estate will be divided up and given to their family. And while this is true, there’s nothing in the law that says who should get what specifically. For many people, this can be problematic. For instance, you might want to pass on a classic car to a particular member of your family. But if you leave the government to divide up your estate, there’s no guarantee that the correct beneficiary will receive the car.

Another reason to declare who gets what is if you plan to give money to people who aren’t your next of kin. In these situations, you’ll need to explicitly declare their share in a witnessed, formal will.

Choose How The Money Will Be Spent

You may plan to have some of your assets cover particular expenses, like the cost of a new car or college education. If that’s the case, then you might want to place some of your money in a trust so that it is earmarked for a particular project. Trusts ensure that the person receiving the money - the trustee - spends it on the thing that you say they have to spend it on.

Minimize Income And Estate Taxes

If you’re leaving a substantial estate, there’s a good chance that you’ll owe a significant amount of property and income taxes. Though these taxes can be burdensome, there are ways to reduce them. For instance, one way to reduce the amount of tax is to leave your taxable assets to institutions, like charities, which are tax exempt. You can then give your other beneficiaries all your assets which are tax-exempt, such as after-tax savings, life insurance payouts and retirement accounts.

To reduce your overall tax burden, you’re also able to give beneficiaries tax-free gifts up to the value of $13,000 a year.