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Personal Finance

Estate Planning Steps to Help Preserve Wealth

August 25th, 2016 | 4 min. read

By Jacob Schroeder

Estate planning stepsImagine playing the board game Monopoly, and instead of collecting $200 as you pass Go, you paid $200. That hardly seems fair. After all, you have no choice -- each player must make his or her way around the board. Unfortunately, this is how the game is played when it comes to your estate. Dying can be expensive. That’s why it’s important to know a little about these estate planning steps that can help keep more of your hard-earned money for your beneficiaries.

Do you need estate planning help? Contact an Advance Capital adviser today. We can help you navigate your financial obligations and recommend qualified estate professionals.

Know the Estate Tax Threshold

First of all, find out if your assets are subject to estate taxes. For single individuals, you can have up to $5.45 million in assets before you are subject to federal estate taxes. It’s about double for married couples. So, more affluent people generally need to worry about estate taxes.

However, some states also have estate taxes and their exemptions can be much lower. For example, Michigan and Ohio do not have estate taxes, but Illinois does with an exemption level of $4 million. New Jersey has the lowest estate tax exemption at $675,000.

If your estate’s value exceeds the federal and/or state exemption, it’s important to meet with your financial adviser and a tax adviser to determine what options may be available to alleviate your tax burden.

You may also need assistance navigating the step-up in basis, which relates to how your assets are valued and taxed. Essentially, assets that you bequeath, including property and investments, are taxed based on their value when they are inherited, not when the initial owner acquired them.

For example, let’s say you purchased a home many years ago for $100,000 and decide to pass it on to a child. When your child inherits the home, it is worth $200,000. If he or she sells it, the amount owed in taxes will be based on the difference between the selling price and $200,000, the stepped-up cost basis, rather than the initial $100,000 purchase price.

Therefore, it may be in your best interest to hang on to some assets until your death in order to potentially reduce taxes for your beneficiaries since they will inherit them at current market value.

Have a Will

A will is an essential document that can help ensure your wishes are fulfilled and your family is protected when you pass away. It can streamline the probate process as your estate moves through probate court, which can be a very time-consuming and expensive experience for your beneficiaries.

The probate process can take 6 months to more than two years, depending on the complexity of the estate, according to the Wisconsin State Bar. Further, the estate planning firm Morris, Hall & Kinghorn, PLLC, estimates probate costs American families up to $2 billion per year, of which up to $1.5 billion is paid in attorneys' fees.

Have a Power of Attorney

Power of attorney (POA) is a written document that allows you to designate someone to act on your behalf, either immediately or upon your incapacity. A durable financial power of attorney, for example, gives someone the legal authority to help manage your assets in the event you are unable to properly handle them yourself.

Without a power of attorney in place, you could place a burden on your family and expose yourself to financial abuse if you start suffering from a diminished capacity.

In the event a power of attorney is not named, the Probate Court may have to get involved to appoint a conservator to handle your affairs. In addition, your family will have to deliberate what they think you would have wanted. Any disagreements could lead to ill will and legal action between family members.

Lastly, a durable financial power of attorney, who may access your financial information, could help monitor your finances and decrease the chances of you becoming a victim of financial exploitation or scams.

Consider Creating a Trust

When it comes to estate planning tips, many people want to know if it’s better to have a will or a trust. Ultimately, it depends on your personal situation, but for many people it’s probably best to have both.

Most people already understand they should have a will, but you should also know the benefits to setting up a trust.

A trust is created while you are alive with instructions on how property is to be managed and then distributed by a trustee upon your death. It can be a way to help prevent beneficiaries from misusing the money you plan to hand down.

Trusts generally cost more to create than wills. However, a will may have to go through the expensive probate process discussed earlier while trusts pass outside of probate, saving everyone time and money.

Seek the counsel of an estate attorney who can help set up a trust that’s appropriate for your situation.

Keep Your Beneficiaries Up to Date

All of the assets you have earned and accumulated can be passed on to a beneficiary in the event of your death. Often, people name one or more individuals early and neglect to ever think about it again.

But, to ensure that your family is taken care of and that your assets are distributed according to your wishes, you must keep your designated beneficiaries accurate and up to date.

Make sure the proper beneficiaries are in place for your retirement accounts. A common mistake remarried couples make is leaving an ex-spouse listed as a beneficiary on an old investment account.

If you do not name any beneficiaries, your assets will go to probate court. So, keep your beneficiary information current. Double check this information periodically and especially after major life events.     

Gift Some of Your Money

Under IRS rules, you are allowed to gift up to $14,000 per person per year. Recipients don’t have to pay taxes on the money. Additionally, giving money away to your heirs can help reduce your estate’s value under the estate tax exemption.

Estate taxes and other estate-related regulations are a common target for government. So the rules of the game constantly change, making it hard for individuals to play on their own. The most appropriate estate planning steps will differ from person to person, but everyone should take some of those steps so you and your family don’t pay more than necessary.