Whether you are just starting to think about your legacy or are in the process of updating your estate plan, you need to make sure that your inheritance funds meet your loved ones’ needs in case of your death or illness. No matter the amount of wealth you have, inheritance planning is an essential aspect of your financial plan, as it ensures that your assets are distributed according to your wishes after your death. 

Understanding the legal and tax implications of inheritance planning can help you make informed decisions that protect your assets while minimizing your tax obligations. 

What is inheritance planning? 

Inheritance planning is the process of arranging and managing the transfer of your assets to heirs or beneficiaries after your death. This process may include creating a will or trust, naming beneficiaries on financial accounts, and possibly minimizing taxes and other expenses that may reduce the amount passed on to your intended recipients. 

The goal of inheritance planning is to ensure that your assets are distributed according to your wishes and in a way that is most beneficial for your loved ones. As a result, one of the most important elements of inheritance planning is creating a will. A will is a legal document that outlines how your assets will be distributed after your death. Without a will, the state will likely determine how your assets are distributed, which may not align with your or your loved ones’ wishes. A will can also be used to appoint a guardian for minor children and can be an important tool in avoiding disputes among family members.

Another important aspect of inheritance planning is naming beneficiaries on your financial accounts. These can include bank accounts, investment accounts and insurance policies. By naming beneficiaries, the assets in these accounts will pass directly to designated individuals, bypassing the probate process. This can help ensure that assets are distributed quickly and efficiently.

In addition to creating a will and naming beneficiaries, it is also important to consider taxes and other expenses that may reduce the amount passed on to the intended recipients. This can include inheritance or estate taxes, which are taxes on assets transferred after death. Inheritance planning can help to minimize these taxes through the use of trusts, gifts and other strategies.

How can you minimize inheritance taxes and fees?

Inheritance taxes can significantly reduce the value of your estate, leaving less for your intended beneficiaries. Minimizing these taxes can help preserve more of your wealth for your beneficiaries. There are several strategies that you can use to minimize inheritance taxes while organizing your estate, including:

  • Establishing trusts — By placing your assets into a trust, your assets can be passed on to beneficiaries without going through the probate process incurring probate fees. Certain trusts can also be used to minimize taxes.
  • Giving charitable donations — When donating assets to a charitable organization, you can reduce the value of your estate and lower your estate taxes. Your assets would pass directly to the charitable organization, meaning your estate would be eligible for a federal estate tax charitable deduction on the account’s value. 
  • Gifting — The more your estate is worth, the more you may owe in state or federal taxes upon your death. One way to reduce the value of an estate is to give to loved ones while you are healthy and in charge of your finances. 
  • Accessing life insurance funds — Life insurance that is paid to an irrevocable trust can typically be accessed and used to pay for estate taxes. Tapping into your life insurance funds can help minimize the impact of estate taxes on your beneficiaries.

It is important to note that inheritance tax laws and exemptions may vary by state and can change over time. As of the publication of this article, Florida does not levy estate taxes, but your estate may still be subject to federal estate taxes if it is worth more than $12.92 million

It is a good idea to consult with a CERTIFIED FINANCIAL PLANNER™ professional and estate planning attorney to understand the tax implications of your specific situation.

Talk to a ProVise CFP® professional about inheritance planning

Estate planning and tax planning go hand in hand. Sometimes, however, minimizing taxes around your estate planning goals can get complicated. At ProVise Management Group, our CERTIFIED FINANCIAL PLANNER™ professionals can get to know you and your current financial circumstances, goals, risk tolerance and personal values to help you develop a plan that works for you. We can also create a written plan for you at a fiduciary standard of care. All our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.

Are you ready to talk to a professional about planning your inheritance? Contact ProVise today to schedule a complimentary consultation.