You’ve worked hard to build up your assets. Maybe you own an independent business. Perhaps you have significant real estate, stock options, or other holdings in family-run companies. Your goal is to pass on these resources so that future generations can benefit from them — but not too soon! In the meantime, you’d like to reduce your tax bill and preserve your assets for future generations while at the same time enjoying them thoroughly in your lifetime.
Here are some tips to save your assets for the future generation.
Preparing for heirs
One of the simplest ways to reduce taxes is to use one of the most powerful estate tax strategies available: giving away money or property during your lifetime. This strategy is especially effective if you plan to leave your heirs a business or family-owned real estate. In some cases, people have eliminated capital gains and income taxes by transferring assets during their lifetime while still in their prime earning years. The key? Avoid problems with the IRS by making sure that the gift is a true gift and not a loan.
Your goal is to transfer money or property while ensuring that your loved ones receive the total value of the asset and that you don’t receive any benefits in return. You can keep all your property documents safe to secure them for a long time. Contact Gun Safe Wholesale suppliers to get one for you.
Use trust funds for maximum benefit
Trusts are another effective tool for preserving assets. Trusts are generally used to provide financial assistance to children or grandchildren yet are also helpful during your lifetime. For example, let’s say you have significant real estate holdings in an area of the country where property values are on the rise. Instead of selling these properties and paying hefty capital gains taxes, you can transfer the properties into a family trust.
In addition, you can set up an irrevocable life insurance trust or ILIT, which will allow you to take advantage of potentially much lower long-term capital gains rates when you sell these properties upon your death. Or, if you’re married and your spouse is not yet 59 1/2, consider setting up an irrevocable life insurance trust or ILIT, which will allow them to withdraw the money without penalty.
Using retirement plans as an estate planning tool
Retirement plan assets also offer significant lifetime-gift opportunities. An IRA, 401(k), 403(b), SIMPLE IRA, SEP-IRA are just a few of the many plan types that can be used to make gifts. (For more information, see IRS publication 571, Tax-Exempt Status for Your Organization.) In addition, employer securities held in retirement plans are among the most favorable assets you can give away.
You may also find that due to the substantial benefits provided by the income tax deduction for employer-provided retirement plans, you want to maximize the deferral of compensation until age 59 1/2. In this case, you can have your business pay for life insurance for key employees.
Using life insurance to preserve tax benefits
In many cases, a simple approach that’s easy to implement is a low-cost term policy with a business as the beneficiary. It will allow you to provide for your spouse and also help protect your business from unforeseen financial challenges while at the same time reducing taxes. A life insurance purchase can even be made contingent upon the death of a key person in your business or family, allowing you to use death benefits as a source of liquidity that won’t be taxable as income.
Making business partners comfortable with their obligations
When planning for succession, you need to ensure that your heirs, or any business co-owners, won’t face huge tax bills when they inherit the business assets. In some cases, joint ownership can result in an estate tax bill of upwards of 60% of the value of each co-owned asset.
One possible solution is to transfer ownership, over time, to one person through gifting or an installment sale agreement. This will provide a step-up in tax basis that can create significant future income tax savings when transferring assets at death. Large gifts before age 55 can also trigger a gift tax, but since the gift is a lifetime gift, it’s excluded from your taxable estate when you die.
Understanding the impact of tax reform
The likelihood of legislative changes in estate and gift taxes over the next few years is high. While widespread agreement exists that the current system has too many loopholes, there are very different views on whether the wealthy should pay more or less under a new code. So right now, there’s too much uncertainty with any changes to include in your estate plans.
Minimizing the risk of state estate taxes
While federal estate tax law is pretty straightforward, every state has its own rules, some of which may be considerably different than federal law. So if you live in a high-tax state like New York or California and expect your net worth to be sizable, you need to make sure that your estate plan reflects the requirements of both federal law and state law.
Getting professional help
Appropriate estate planning requires advanced knowledge of the tax code. Without proper guidance, many people may not be able to take full advantage of their opportunities to maximize lifetime gifts, minimize taxes on gifts, protect retirement plans, and minimize the impact of state estate taxes. Therefore, it’s essential to seek professional help that understands your goals and has experience with tax planning for closely-held businesses and family-owned companies. In addition, professionals suggest storing your valuable assets in residential safes to keep them secure.
Whether it is for your children, grandchildren, or even great-grandchildren, one of the most important things you can do when creating a will is to distribute your assets in a way that honors your wishes and makes everyone happy.
The best way to avoid the problems of high estate taxes and cumbersome probate proceedings is to plan. Speak with a qualified professional in your area about ways you can protect your assets from unnecessary taxation and allow them to pass on to heirs more quickly.