Money – it's tough to earn, but easy to give away, right? Well, not always, particularly if taxes and asset preservation are critical considerations to your wealth transfer plans.*
The business of properly passing along your money and property to your beneficiaries should not be left to good intentions, happenstance or the tax man. Instead, by designing and executing a well thought out wealth transfer plan, you can maximize your assets, minimize taxes and ensure your wealth is transferred to others efficiently and effectively.
Wills and Trusts
At a minimum, you should have a current, professionally drafted will, specifying your wishes for asset distribution. Do not rely solely on verbal instructions to family members or friends. Even if your heirs have the best of intentions, verbal instructions can easily be misinterpreted, ignored or forgotten.
Know also that if you die without a will, everything you own will be distributed according to your state's probate laws. In some cases, this means your property may never reach those you intended, and it may also mean a sizable estate tax bill.*
Trusts can be a useful asset distribution tool for those with substantial estates or complicated family structures (due to divorce, remarriage, etc.). A properly executed trust can ensure your assets are handled according to your guidelines. Some trusts may even provide you with current income.
Low-Cost Asset Distribution
One of the easiest and least expensive ways to transfer assets to beneficiaries is to make annual cash gifts. Currently, each year you may give up to $14,000 each to as many people as you wish without triggering the federal gift tax; if your spouse joins you in the gift, you may double this amount.** Within just a few years, you could easily give away a six-figure sum, free of taxes.
A joint tenancy account (sometimes called joint tenancy with rights of survivorship) enables your property to pass to a surviving owner (or owners) without the time or expense of passing through probate. Laws governing joint tenancy vary by state, so check to see how your locality governs the process.
Designating a bank account as "payable on death" enables it to pass to the alternate person named on your account when you die. Nicknamed the "poor man's trust," payable on death accounts accomplish the same main goal of a lawyer-drafted trust (asset transfer) for free. The only drawback to a payable on death account is that you cannot name alternate beneficiaries on one account. This can be resolved if you open multiple bank accounts, each with a different beneficiary.
Consult with a Professional
Properly transferring assets may require consultation with a qualified professional. Please contact an estate planning attorney for more information.
* Under the 2010 Tax Relief Act, there is a $5 million exemption and a maximum 35% tax rate.
** This is the exclusion amount for 2013. It is scheduled to increase with inflation in future years.
California Teachers Association does not give tax advice. Please consult your tax advisor or attorney for information specific to your situation.