You have worked hard for everything you have and you no doubt want to leave your children with your assets when you pass. While this sounds simple enough, the truth is that estate tax laws are downright confusing, and one small mistake or oversight can have serious financial implications for your heirs.
When it comes to estate planning, there is a number of different estate tax planning strategies you will want to explore with your attorney.
Tax benefits through trusts
Trusts can be beneficial for a number of reasons. These financial estate planning tools allow you to not only decide who will receive your assets, but you can also set stipulations for how and when these assets can be used -- both while you are alive and after you pass. In addition to giving you more control over your assets, irrevocable trusts also provide tax benefits, as the assets are considered no longer owned by you and are therefore not subjected to estate taxes.
There are also many different types of trusts. When setting up a trust, you should make it clear what your goals are with your attorney, who can then provide direction on the best type of trust to help you reach those goals.
Avoiding taxes through gift giving
While much of estate planning talk has to do with leaving money to heirs after you pass, know that you can give away your money now in the form of a gift without your heirs needing to pay taxes on it. The cap is $14,000 per year. You can give up to $14,000 per year per person as a gift without that person needing to pay taxes on it. With some planning now, not only could you spread out the money over several years, but this will also reduce the overall value of your estate, which also could mean less taxes.
Understanding your retirement accounts
It's a common misconception, but your beneficiaries will not just receive the full amount of a traditional IRA or 401(k). Rather, these types of accounts are subject to income tax.
One way for your beneficiaries to avoid having to pay this tax bill, though, is by converting the accounts to Roth accounts.
Taking the next step
It is understandable that you want to leave your assets with your loved ones, with the least amount of tax burden for them. After all, it is your money and you should be the one to decide how it will be passed down. The specifics of how to do this, though, will be entirely dependent on your unique financial circumstances. The best way to do this is by having an open and honest discussion with an attorney who truly understands your goals.