Part of the joy of estate planning is knowing that people you care about will benefit from a lifetime of savings and earning. A large tax bill, however, can reduce that benefit significantly, leaving heirs and beneficiaries with much less than you intended to give them. U.S. News and World Report recently shared some estate planning advice that may help you keep more money in your family and less in the hands of tax collectors. Here are three of the most useful tips.
Seize the power of trusts
Trusts are perhaps the most useful tax-saving instrument in the estate planning toolkit. When you place money or assets in an irrevocable trust, that wealth no longer belongs to you, it belongs to the trust. The benefit of this arrangement is that the assets are not subject to estate taxes when they are transferred to trust beneficiaries. A carefully-drafted trust may also protect assets from:
- Creditor claims
A trustee will oversee the trust and its distribution, but you can control how it works upon its inception. For instance, if you want to place stipulations on the release of trust assets, you can establish the language of the trust to perform that function.
Consider converting retirement accounts
Distributions from traditional retirement accounts are subject to taxation. If you convert your traditional account into a Roth account, however, distributions are not taxed. The converted amount is taxed, but this taxed amount may be significantly lower than the total tax bill your beneficiary would be responsible for over the period he or she is withdrawing money from the inherited account.
The IRS allows people to give up to $15,000 per year in gifts per year to any given recipient without incurring a tax burden. By prudently gifting your wealth and assets, you can eliminate this money from your estate, thus lowering the overall tax bill. An added benefit of gifting is that contributions to qualifying charities are tax-deductible, and will provide you with tax savings in the current year.
Careful estate planning can grant you peace of mind while sparing your beneficiaries from unnecessary taxes, complications and disputes. If you have concerns about protecting assets, these tips can provide you with a head start on establishing an estate plan that fulfills your wishes.