Many are well aware that a generous inheritance can be eroded by state and federal taxes and transfer penalties. However, seasoned financial advisors serving those in McLean, Virginia know strategies that help protect your family’s wealth from these penalties. Let’s take a look at some of the ways to manage an inheritance.

Complexity of Inheritances

When you hear that a single person may give over $5 million in assets before paying estate taxes, you may be relieved. While this is true, there are other fees that come into effect well before that five-million-dollar cap is approached.

When a person gives away property, other than a primary residence, or transfers retirement or IRA accounts to non-spouse beneficiaries there are fees. These fees fall under what’s called “step-up in basis.” Upon transfer, the assets are valued at their current market value, which makes up the cost basis.

Another factor to take into account is state taxes. Some taxes have very low thresholds for charging estate taxes.

So, how does one protect the integrity of the estate?

1. Have a Will

You’re probably thinking that this is unnecessarily stated. According to AARP, in 2017 nearly 6 in 10 adults didn’t have prepared wills. How’s that for protecting an inheritance, Hilton Head?

When you do not have a will, you do not decide how your assets are apportioned, probate court does. Moreover, your estate is chipped away by attorneys’ fees and taxes. Food for thought.

2. Know the Beneficiaries

Retirement accounts, pensions, and other policies are distributed according to who is named as a beneficiary. It’s not uncommon for former spouse to still be a beneficiary on a policy, even after remarriage!

Each significant life change (marriage, divorce, remarriage, birth, etc.) merits at least a consideration of adjusting the beneficiary on any such accounts you have.

3. Create a Trust

Creating a trust can help bypass estate taxes essentially by removing the wealth from your direct ownership. The trust owns the wealth in an irrevocable trust.

An added bonus, placing the funds in a trust can also protect the wealth from being spent irresponsibly by heirs (if that is a concern). The funds will be distributed by an appointee of your choosing.

Trusts do pay taxes on dividends, interests, etc., but they can be paid from the trust. Consulting an estate attorney is advised due to the complexity of trusts. They can help set up a trust that accomplishes exactly what you need.

4. Transfer Retirement Accounts to Roth IRAs

Surprisingly, beneficiaries who aren’t spouses who receive an inheritance from traditional IRAs and other retirement accounts will be subject to income tax for each distribution. With Roth IRAs, the distributions aren’t taxable.

Keep in mind that it’s not advisable to make all your transfers at once because this can be taxed as income and risks pushing you into a higher income tax bracket. It’s worth taking some time to transfer funds over time to avoid being unduly taxed.

5. Give It Now

Because the IRS does not tax gifts up to $15,000 per year, you could conceivably pass on wealth to your heirs while you’re still living. The intention would be to distribute your wealth to whom you wanted while reducing the overall wealth of your estate. Ideally, you would reduce the value of your estate, thereby reducing the taxes on it.

If you’d like to be more generous with your estate, you can set up a philanthropic fund and name a successor. This provides a tax reduction, not to mention the charitable benefits for your community.

Managing an Inheritance | McLean

We hope that this brief discussion of estate planning strategies shows just how important planning is. If you intend to leave your loved ones an inheritance, ensuring that it remains within the family is probably paramount. However, seasoned financial advisors at Argent Bridge Advisors serving those in McLean, Virginia know strategies designed to help protect your family’s wealth from these penalties.