Estate Planning for Generational Wealth and Favorable Tax Situations
Estate planning, why are we talking about this? Because we want to make sure that all our hard work accumulating wealth throughout our lifetime doesn’t go to waste. Estate planning is not just for the wealthy or the elderly, but a valuable tool for all individuals from all walks of life.
What is estate planning? It arranges for the management and distribution of your assets in the event of your death or incapacity. It involves key decisions regarding your finances, healthcare, and the future well-being of your loved ones. It isn’t just a Living Will, but a comprehensive strategy to ensure that your wishes are honored and potential conflicts are minimized if not completely eliminated.
*Information gathered is for 2024. The numerical values change every year. But the whole concept of this article remains relevant*
Here are some of the key benefits of estate planning:
The most obvious one is asset distribution. This makes sure that your assets are distributed according to your wishes. This avoids disputes among heirs.
Protects Minors - you can designate a guardian for your child(ren) in the event of your passing.
Healthcare Decisions - You can assign a Power of Attorney who will be making decisions on your behalf when you become incapacitated. You can also create an Advanced Directive in order to specify your wishes regarding medical treatments.
Serves as an asset protection strategy - protects against potential creditors or legal claims.
Crucial for business owners in determining the future of the business after the owner’s passing/retirement.
Avoid Probate - creating a revocable living trust can save you the headache and unnecessary expenses of probate. Probate can be costly. This trust can include all assets such as bank accounts, real estate, vehicles, and so on.
In California, if your estate is worth more than $166250 it goes into probate. (According to courts.ca.gov)
Probate fees are paid out of your estate, so the fees you pay reduces the estate’s value. If you didn’t have that much to begin with, then most of the estate will just end up with the government as probate payments.
The best reason of all is that estate planning can help minimize taxes on your estate via different strategies such as
Gift giving - using the annual and lifetime gift exemptions. For 2024, the annual gift tax exclusion is up to $18000 per donee. The lifetime gift tax exclusion is $13.61 Million.
Use of trust - by placing a life insurance policy inside an irrevocable life insurance trust (ILIT) to exclude the death benefit from the taxable estate. Or transfer your residence to a Qualified Personal Residence Trust (QPRT) in order to reduce the value of your taxable estate.
Create a Qualified Personal Residence Trust (QPRT) or a Grantor retained annuity Trust (GRATs) and use it to freeze the value of certain assets. Transferring a residence to a QPRT retains or freezes the current value of the home at the time of transfer. This is very beneficial because typically real estate significantly appreciates over time especially in popular locations.
You can form either a Family Limited Partnership (FLP) or Family Limited Liability Company (FLLC) to transfer assets to family members, meanwhile taking advantage of discounted valuations and decreasing your taxable estate.
Consider using the Qualified Personal Residence (QPR) exclusion, which allows for a portion of the home’s value to be excluded from the taxable estate.
Luckily for Californians there is no inheritance tax. Make sure you research the law and exemptions of the state where your assets are located, as these can vary. Some states have differing estate tax thresholds.
Married couples can maximize the use of estate tax exemption by ensuring proper portability. This allows the surviving spouse to use the deceased spouse’s unused exemption. The executor of the estate must file IRS form 706 within 5 years.
You can pay education and medical expenses directly to institutions on behalf of the beneficiaries.
You can utilize the strategy of sales installment to transfer assets at a discounted value over time in order to spread out the gains and reduce the taxable estate.
Charity - you can create Charitable Remainder Trust (CRT) to provide an income stream to your beneficiaries while also donating the remaining assets to charity. On the other hand, you can also contribute assets to a Charitable Lead Trust (CLT) where the charity receives income for a specified period before the remaining assets then go to your beneficiaries.
Estate planning is a part of wealth accumulation that allows your family to retain most if not all of the wealth within the family (if that’s what you intend) or to be able to donate to certain charities you are passionate about in order to improve society. Estate planning, in an essence, is to build a lasting legacy of generational prosperity. It’s an investment in the future that is worth your trouble to start today.
Please note that what I write here is all information I researched and want to share but should not be mistaken as professional advice. Please consult with a qualified professional for advice tailored to your specific situation.
