How to Use Cost-Effective Strategies to Leave Your Assets to Your Beneficiaries

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After accumulating many assets over the years, you want a way to pass them on to your beneficiaries and do it as cost-effectively as possible. Many cost-effective strategies are available to pass an estate and assets to your loved ones.

Establish a Trust

One of the best ways to do it, which is expensive, is to create a trust. Trusts can pass your assets along tax-free, keep the details and names involved private, as well as ensure that your assets go to the designated people. They are considerably more secure than using a will. Many rich people use trusts to avoid taxes.

A potential problem with creating a trust is that there are two kinds. The first is called a revocable trust. It enables you to retain possession of your assets while alive, but a potential problem occurs if you die with them still in this trust. In this case, the assets go to the estate after your death and then are subject to taxes. A pour-over will puts your remaining assets into the trust at your death—avoiding taxes.

The other kind of trust is an irrevocable trust, which means the assets in it no longer belong to you. Once there, however, it is protected because it is no longer part of your estate and is non-taxable. When using a trust, you have better control over how the money is distributed. The AARP suggests you might distribute some of it to children when they reach a certain age, such as giving one-third of it at 25, 30, and 35.

Cost-Effective Methods of Asset Transfer

Here are some other methods that could be part of your estate planning strategies. Some of them will save you a lot of money.

Gift Your Assets to the Beneficiaries

Instead of waiting until after you die to disperse your estate and assets, you can pass some of them by gifting your assets away. By doing so, you can see the joy of your beneficiaries when they receive them, and it can help them at the same time.

The Internal Revenue Service allows you to give monetary gifts to individuals up to $16,000 per year (in 2022, $17,000 in 2023)—a gift exclusion. Couples can give up to $32,000. This amount is per person and lets you give $16,000 annually to the same individuals and to as many people as you want. Gifts are not tax-deductible, but they will reduce your overall estate. Any gifts that exceed $16,000 need to be reported to the IRS on Form 709.

Make Donations to Charitable Organizations

Another way to reduce your estate size is to make donations to charity. Investopedia says these donations are deductible on Schedule A and are limited to 60 percent of your adjusted gross income. The percentage will vary when giving to some organizations.

There is also a limit to how much you can give away in your lifetime, which changes every few years. The lifetime estate tax exemption is not affected by giving gifts to other people. The lifetime gift exemption for 2022 is $12.06 million for an individual and $24.12 million for couples. In 2023, it will be $12.92 million for individuals. The total amount will be reduced in 2026 to $6 million. Most people will never pay the gift tax because amounts over the annual limits get deducted from your lifetime exclusion limit.

Be careful about giving away too many assets, especially if you are counting on Medicaid to help pay for your long-term care. Thrivent says that Medicaid may penalize you if your gifts to charity or loved ones occurred within five years before applying for benefits. It is called a lookback period. It could mean delaying payment for services—possibly causing you to need to recover some of your assets.

Give Money to a Child

If you want to give money to a child, you can do this in several ways and still get a tax break. You can donate to an account for their education, such as a 529 plan.

529 plans have contribution limits that vary by state. They enable you to pay up to five years in advance. Withdrawals are tax-free when they are made for education-related expenses.

Another account for minors is the Uniform Transfers to Minors Act (UTMAs). These accounts are subject to the annual gift exclusion. All money in the account is given to the beneficiary once they reach the custodial termination stage, which is determined by the state (usually 18–25).

Add Joint Ownership

Instead of just giving assets to loved ones, you might make them joint owners of your accounts. When you die, the property automatically transfers to the joint owner.

Transfers

One of the simplest ways to transfer assets is to use a transfer-on-death provision. Only some states allow this type of beneficiary deed. Money.USNews says that it is the least expensive and simplest way to make transfers to beneficiaries. It also can override a will.

Retirement Accounts

Traditional accounts, such as a 401(k) or IRA, can be beneficial while the account owner is alive; but after death occurs, it could become difficult for the beneficiaries to deal with taxes. The taxes could consume a good chunk of the inheritance if it places the recipients into a higher tax bracket.

Except for a spouse, children, and other designated beneficiaries, the IRS says that others that inherited retirement accounts must withdraw all of the money within 10 years. A Roth IRA, which normally does not require minimum distributions, still requires non-spousal beneficiaries to empty the account within ten years.

Make Direct Payments

When your children or grandchildren have certain types of expenses, you can make direct payments to those organizations. WelchGroup says this method enables you to transfer some of your wealth for their benefit and still reduce your tax burden. You can gift the money directly to medical or educational institutions on their behalf.

Life Insurance

Taking out life insurance policies and naming beneficiaries can be another excellent way to pass on your assets. It can also be used to even out assets when there are not enough to go around. Anyone you intend to benefit from your life insurance policy should be named as an insurance beneficiary on the policy.

Before using any of the above cost-effective strategies in your estate plan to pass on your assets, be sure to check with an estate planning attorney to understand any tax consequences that may have changed. They may also be able to recommend other ways that may be more suitable to your intentions and situation.

The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.