Plan for the Future

4 Ways to Leave an Inheritance

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When it comes to passing assets on to your heirs, there's no one-size-fits-all solution. Should you establish a trust? Should you give away assets now instead of waiting until your death?

The answers to these questions depend on a variety of factors. These could include whether you're married or have minor children, the value of your estate and whether you want to control how your heirs use their inheritance.

Here are a few inheritance methods to consider, as well as what to keep in mind as you choose the right options for you and your loved ones. Your decisions can have significant tax and financial implications; in particular, estate taxes can apply to your beneficiaries if your estate is worth more than approximately $5 million (this number increases each year for inflation). Always consult with your estate attorney, your financial advisor, or your tax advisor for guidance on your particular situation.

1. Financial gifts while you're living

When to consider this method

If your estate is worth at least $2 million and you're on track with your financial goals, you might want to consider financial gifts to your heirs now. You can see them enjoy your gift and help manage tax implications of larger gifts.

If you have less than $2 million, you will likely want to focus current assets on your own retirement instead of giving money away now.

What to keep in mind

You can give as many individuals as you wish up to $14,000 annually (or $28,000 as a couple) without tax implications for either party. This is known by the IRS as the "annual exclusion."

Payments made directly to educational or medical providers are tax-free and do not count against the annual exclusion.

2. Trusts

When to consider this method

A trust establishes a fund to be managed by a trustee for the benefit of a particular beneficiary.

The most common trust is established for children whose parents die before the children turn 18. In many instances, the trustee will use the trust to pay for the children's expenses until they turn 18, at which point they gain control of the trust.

Children often gain control of trusts when they turn 18. However, you can also choose to give them the money when they graduate from college or reach some other criteria or age.

What to keep in mind

In addition to a traditional trust established to manage the assets of your minor children, there are many other types of trusts.

Trusts can be especially beneficial if you have a large estate and want to manage tax implications. Talk to your estate attorney, financial advisor or tax consultant about other types of trusts that might be right for your situation. These could include charitable trusts, family trusts, insurance trusts and living trusts.

3. Special needs trusts

When to consider this method

A special needs trust can help you provide for a loved one with a disability to avoid compromising his or her Medicaid, Social Security and other governmental assistance.

What to keep in mind

A special needs trust needs to keep in mind many complex rules that could have significant financial consequences including disqualification from governmental programs. Be sure to consult a professional who has expertise with special needs trusts.

4. Non-probate assets

When to consider this method

Non-probate assets are transferred directly to your beneficiaries without going through the probate period. These can include:

  • Life insurance, retirement plans or similar assets for which there is a named beneficiary.
  • Assets owned as a joint tenant with right of survivorship.
  • Community property that passes certain assets directly to your spouse. In some states you may need to designate assets as community property with right of survivorship. In other states, assets acquired during marriage are automatically owned equally by both spouses.

What to keep in mind

Your estate attorney, financial advisor or tax consultant can help you coordinate your non-probate assets with other assets that will go through the probate process. This coordination can help manage taxes and other implications of your total gift to a particular beneficiary.

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