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Estate Planning Strategies to Minimize Taxes and Expenses Your Beneficiaries Pay

No one likes to think about the end of his or her life. However, we all need to take the time to prepare for the day that we pass away, because if we do not, the loved ones we leave behind could be left to deal with financial difficulties unnecessarily. One of the things we should do, and preferably now rather than later, is prepare a will and trust documents as part of a comprehensive estate plan.

By doing so, we can ensure that the things we leave behind end up in the hands of the people or organizations we want them to, rather than leaving it to the court system to decide for us. That being said, if you are going to go through the trouble of preparing a will or trust, you should make sure that you prepare an estate plan that minimizes taxes your beneficiaries pay as well as other expenses they could otherwise be stuck with following your passing.

How to Construct an Estate Plan That Minimizes Taxes Your Beneficiaries Pay

There are a number of strategies for putting together an estate plan that minimizes taxes your beneficiaries pay. Every situation is different, and the estate plan will be determined by the amount and type of assets and debt, whether a business is involved, how the beneficiaries are related and more. Here are a number of potential considerations for an estate plan:

  1. Create a Will – Many people mistakenly believe that only the wealthy need to create wills or trusts. However, this is far from the case, as most people should have a will, trust or some sort of legally binding estate plan in place in the event of their death. If you do not have an estate plan and you die, most of what you leave behind, including any money, investment accounts, personal possessions, homes or property, businesses or retirement accounts, will be distributed to heirs as determined by Illinois state law. In such cases, the people or organizations may not receive what you assumed would automatically go to them. In fact, your loved ones could be completely left out in the cold, receiving little to nothing in some cases, with the government and attorneys taking the lion’s share of your estate. Simply creating a basic will can prevent this from happening.
  2. Draw Up a Trust – The advantages of trusts are many. Setting up a trust will enable you to prevent your beneficiaries from making financial mistakes with your wealth by having a trustee you appoint in charge of distributing your wealth according to your specific instructions as to how the money can be used. In addition, trusts offer tax benefits. For instance, in the case of an irrevocable trust, any money you put into the trust is no longer considered your asset but instead is seen as belonging to the trust itself, which means it cannot be subject to an estate tax. However, trusts can be subject to taxes on income from interest and dividends as well as other sources.
  3. Create a Business Succession Plan – If you own a family or closely-held business, you must think about what will happen if you become sick or are involved in an accident. Who can take care of the finances? Who will have the authority for important decisions? If a business owner does not have a succession plan in place before something happens, the company and employees will face extreme uncertainty and chaos in the aftermath of illness or death.
  4. Keep Beneficiary Information Updated – Certain items, such as life insurance policies and retirement accounts, are not disbursed using a will, but instead must have a beneficiary or beneficiaries named to prevent their fate from being decided in probate court. Therefore, throughout your life, both periodically and after life changes, such as marriage or the birth or adoption of a child, you need to review and update your beneficiary information on your retirement accounts and life insurance policies.
  5. Begin Passing on Your Estate While You Are Still Alive – The Internal Revenue Service (IRS) allows individuals to give as much as $14,000 to each family member annually as a gift that is tax-free for the recipient. In addition, you can pass on your wealth through charitable donations while you are still alive, which under many circumstances, such as a donor-advised fund, provides tax benefits immediately as well as after your death.
  6. Set Up Roth Accounts – Retirement accounts, such as a 401(K) or IRA, are subject to income tax if passed on to a beneficiary after death who is not the deceased’s spouse. To avoid this, you can convert your 401(K) and/or IRA to a Roth account that allows tax-free distributions to beneficiaries. You may not be able to make the conversion all at once, but instead will have to gradually convert your accounts over a few years.

If you live in Chicago or its surrounding suburbs, the Des Plaines and Hoffman Estates lawyers at MacDonald, Lee & Senechalle, Ltd can guide you through the process of successfully taking care of probate issues, estate planning, trust administration and business law issues.

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