If you’re thinking about the best assets to inherit or what to pass on to your family, here are some really good things to consider.
When you decide to leave something for your family after you’re gone, you’re giving them a helpful financial boost. But there are things you can leave that can be even more helpful.
Michael Romero, who works at Argent Financial Group, a company that takes care of money and property, says it’s smart to plan ahead. He explains that if you don’t plan, someone else will have to deal with your stuff when you’re not around, and that can be really tough, especially when people are feeling sad.
Over the next 30 years, a lot of money and things will move from one generation to the next. This has already started. In 2019, the average amount of money people inherited was $92,700 if their parents went to college and $76,200 if their parents didn’t.
Some things you leave can be better for taxes and money reasons. But the most important thing is that with careful planning, you can avoid fights and problems that happen with some things people inherit.
Neil V. Carbone, who works with trusts and estates in New York, says not thinking ahead can be a big problem when planning what to leave behind. He explains that problems often come up after you’re not here anymore to fix them or say what you wanted.
If you’re ready to plan for your family’s future, here are six great things to leave behind for them as a gift.
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What you'll learn:
Let’s talk about good old cash. Neil V. Carbone has some smart advice: “Cash is a top choice when it comes to giving your loved ones a financial boost.” Why, you ask? Well, it’s the easiest thing to handle when you pass it on.
Your family won’t need a detective to figure out how much it’s worth. Plus, they can split it up just the way you want them to, thanks to your will. And here’s the best part – they won’t have to wait a long time to get their hands on it. Unlike something like real estate, which can take forever to sell, cash is quick and easy.
Now, Michael Romero has some extra tips. If your cash is in different banks, think about putting it all in one place, especially when you get older. Why? Because every bank has its own rules for handing out cash, and fewer banks make things simpler for your family.
But remember, don’t put too much in one bank – the FDIC only covers up to $250,000 in each bank for different types of accounts. So, be careful.
Carbone also suggests telling your family that they might get a bunch of money, and they should talk to a money expert about what to do with it. It’s not every day you get a big pile of cash, right? They might have different money plans than you did when you saved all that cash.
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2️⃣ Cash Substitutes
Apart from cash, Michael Romero talks about a few other accounts that work pretty well for passing on to your loved ones. Let’s break it down:
1. Life Insurance: This one’s like a safety net. When you’re not around anymore, the insurance company pays your family the money you chose in your insurance policy. It’s straightforward, and your family doesn’t have to wait for the legal stuff (probate) to get the cash.
Your family just needs to show the insurance company your death certificate and fill out a short form. And here’s a bonus: the money they get is usually tax-free, but it might make your overall money pile bigger, which could mean some taxes later.
2. Money Market Accounts and CDs: Banks also have some good stuff for your family. Money market accounts and CDs are like quick and easy inheritances. Your family can share and use the money right away.
But be careful if they cash out a CD early because they might lose a bit of the interest. You can make things super easy by setting up a “payable upon death” (POD) instruction for your bank accounts. This way, your family can skip the legal stuff, and they won’t be able to take the money while you’re still around, which is a good thing.
But here’s the important part: Romero says you should be extra careful when you set up these accounts and instructions. “Life insurance and POD instructions work like contracts, not like wills,” he explains. So, even if your will says something different, the bank or insurance company will follow what you wrote in your beneficiary and POD instructions.
One tricky situation is when people forget to update their instructions after big life changes like divorce or if someone in the family passes away or a new family member comes along. Romero suggests taking a look at these instructions every year or two, just to make sure they’re still correct. Better safe than sorry!
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3️⃣ Brokerage Accounts
Investing your money in a taxable brokerage account can be a great way to leave something behind for your loved ones. Here’s why:
1. Stocks, Bonds, and Mutual Funds: These are like building blocks for your money. Your heirs can easily split them up because they can see how much they’re worth in the stock market. Plus, if they want cash instead, selling these investments is a breeze.
2. Tax Perks: Here’s the cool part – your heirs might get a tax break on these investments. Let’s say Dad was into stocks like Apple, IBM, and Microsoft for ages. If he sold them while he was alive, he’d have to pay a good chunk of money in taxes. For instance, if someone bought IBM in 1990 for around $28 per share and sold it today for about $148, they’d owe taxes on the $120 they made per share.
But if you hang on to these investments until you pass away, something magical happens. It’s called a “step-up-in-basis.” That means the starting price of the investment goes up to the market value on the day you die. So, if your heirs sell these investments shortly after you’re gone, they might not owe much, if any, taxes. That’s like a tax gift from beyond the grave!
This special tax treatment also works for real estate. If you’ve owned your home or other property for a long time, it’s a nifty way to avoid paying a ton in capital gains taxes. However, real estate can be a bit tricky for your heirs to handle, and it could lead to disagreements.
To sidestep this, you can tell the person in charge of your will to sell the property right after you pass away. That way, your heirs get the cash without dealing with capital gains taxes or property disputes.
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Now, here’s a bit of a different strategy, and it’s not for everyone. But in certain situations, it can really help.
So, let’s say you think you might have to pay estate taxes when you pass away. Neil V. Carbone has a pretty clever idea to help you reduce those taxes. Here’s how it goes:
Imagine your heir plans to buy something fancy, like a shiny new sports car or a boat, as soon as they get their inheritance. Well, guess what? These things lose their value super fast.
For example, a brand-new car can lose about 10% of its value in just one month after driving it off the lot. And other cool stuff like boats and fancy jewelry can lose value really quickly too, even if they’re still in top-notch condition.
So, instead of giving your heirs a bunch of cash, you could buy these luxuries yourself right before you pass away and then leave them as an inheritance. Since these things lose value as soon as they’re bought, it lowers your total worth and the taxes your heirs might have to pay.
Here’s an example: Let’s say you buy a $500,000 boat, and it loses 20% of its value before you pass away. That means your heirs only have to pay estate taxes on $400,000 instead of the full $500,000. If you do this with different things and for different heirs, it can really cut down on the estate tax bill.
Now, right now, the federal estate tax only kicks in if you have a ton of money, like over $12 million. But laws can change, and they might lower that limit in the future. Plus, some states also have their own estate or inheritance taxes, so this strategy could be a lifesaver if you live in one of those states.
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5️⃣ Roth IRA
Let’s talk about something called a Roth IRA. It’s like a special savings account for your retirement. The cool thing is you put money in this account after you’ve already paid your regular taxes. But here’s the sweet part: when you retire and take money out of it, you don’t have to pay any income tax, even on the money your account earned from investments. That’s right, it’s all tax-free!
Now, here’s the neat part for your family. When you leave this Roth IRA to your heirs, they still get to enjoy that tax-free perk. It’s like a tax-free gift from you even after you’re gone.
But, here’s the twist. If you leave behind a 401(k) or a traditional IRA, your heirs will have to pay taxes when they take money out. And, they’ll need to take all the money out within 10 years of your passing, whether they really need it or not. This could push them into a higher tax bracket, and nobody wants that.
So, here’s a smart move if you have both types of retirement accounts. You could use your taxable accounts or give money to charity during your lifetime and keep your Roth IRA intact for your family to inherit later.
Or, you could change some of your money from the taxable retirement accounts into a Roth IRA. Yes, you’d pay taxes on it upfront, but after that, everything in the Roth IRA, including any growth, is safe from taxes when it comes out.
But be cautious! Neil V. Carbone reminds us to think about the whole tax picture. Sometimes, it might make more sense for a parent in a high tax bracket to pay the taxes on a traditional IRA withdrawal than for a child in a lower tax bracket to pay taxes on a converted Roth IRA.
Plus, when you convert, you have to pay all the taxes at once, whereas with an inherited account, you can spread them out over 10 years. So, it’s a bit of a juggling act to figure out what’s best for your family’s wallet.
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6️⃣ Trust Funds
Now, here’s a tip that’s more about how you leave your assets than the assets themselves. It’s all about trust funds, and they can be a real gift for your loved ones.
When you leave your property directly to your heirs, it’s like putting it out in the open. That means it can be fair game for your heir’s debts and even people who want to get their hands on your family’s inheritance – like a spouse with big spending plans or someone going through a divorce who wants a slice of the pie.
But a trust fund is like a shield for your loved ones. Neil V. Carbone puts it this way: “If you leave property directly to your heirs, it can be grabbed by their creditors and other folks who want a piece of the action.”
Trust funds also help protect your loved ones from themselves. Maybe you’re worried they might blow through the money too quickly. With a trust, you can set up rules, like only allowing a certain amount of money out at a time or passing it down to your grandkids later on.
And here’s another nifty trick: Trust funds can be part of your plan to lower the taxes your family might owe. You can move assets into a trust now if you think they’ll grow in value. That way, when you pass away, the growth isn’t counted in your taxable estate. It’s like a little tax-saving secret!
So, trust funds aren’t just for the super-rich. They can be a smart way to keep your legacy safe and sound for the people you care about.
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➤ Final thoughts
When it comes to leaving something behind for your family, thoughtful planning can make a world of difference. Choosing the right assets and strategies can not only provide for your loved ones but also safeguard your hard-earned wealth.
Consider the simplicity of cash or cash equivalents, the tax benefits of Roth IRAs, and the tax-saving potential of trust funds. Each of these options offers unique advantages, and selecting the best fit for your family’s needs is essential.
Remember, your legacy isn’t just about the assets you leave; it’s about the financial security and peace of mind you provide to those you care about most. So, take the time to plan carefully, review your options, and ensure that your loved ones are well taken care of, even after you’re gone.
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