If you have assets, such as a 401(k), savings or brokerage account, or a home, you need to consider how those possessions will be distributed when you are gone. In its recent article, “How to start thinking about an estate plan,” CNBC provides some tips to nip in the bud any fight by your kids and to limit your heirs’ tax responsibility.
Even if your plan is to leave your assets directly to your children, you should consider that not everyone is good with money and there are certain steps you can take to make sure they don't waste it. To help decrease the odds of your kids squandering your money, take a look at these tips for how and when your assets are passed down.
One wise way to distribute your wealth is to leave it to your children via a trust, which can be designed in several different ways. You can set it up so it specifies precisely when assets pass to your beneficiaries (like when they reach age 18, 21, 35, or whenever you choose) and how the money is to be used (like only for education expenses).
A trust can also help your estate avoid probate court and reduce your estate taxes. Another benefit of a trust is that your heirs will be able to access the money, but it will be exempt from creditors. The trust assets are also considered separate from marital property, so if one of your children were to divorce, that money will not end up with an ex-spouse.
There’s also a strategy that allows the money in a 401(k) or IRA to be transferred into an IRA trust. Just like a traditional trust, these assets are protected from bankruptcy, and withdrawals are managed by a trustee. This will keep an heir from treating an inherited IRA like a blank check, when the account owner dies.
Another option when it comes to creating a trust is to have it created under your will.
One important reminder is that the beneficiaries named on financial accounts, such as IRAs, retirement accounts, insurance policies, and brokerage accounts, take precedence over what is in your will. Thus, it’s critical to keep beneficiary designations current.
Speak with a qualified estate planning attorney to help you determine the best ways to keep your kids from fighting—or overspending—and limit the amount of taxes your heirs have to pay.
Reference: CNBC (November 21, 2017) “How to start thinking about an estate plan”