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Deciding what assets to leave to your heirs is an essential part of estate planning. The choices you make can have a significant impact on their financial well-being in the future.
Many people want to leave their loved ones with money or valuable assets after they die. Truthfully, you can leave almost anything to your heirs, but certain assets are more beneficial from a monetary and tax perspective.
Before deciding what assets to leave, it is crucial to consider the tax implications, ease of transfer, ease of accessing the money and future asset value. The best assets to inherit are those with minimal tax implications, can be easily liquidated and don’t have to go through a probate process.
Keep reading to discover some of the best assets to leave to your heirs.
Cash is one of the best options to inherit because it is not considered taxable income by the IRA. Cash is also one of the most liquid assets, as you can use it immediately for anything.
Be mindful of inflation and changes in the cost of living over time when estimating the appropriate amount of cash to leave behind.
Life Insurance Benefits
Money from a life insurance policy is nearly as good as cash for inheritance because it also isn’t taxable by the IRS.
The life insurance policy will provide a lump sum payment to the beneficiary upon the policyholder’s death. If the owner of the life insurance policy named a beneficiary, that person will need to provide a death certificate and fill out some paperwork before the policy is paid out.
However, if no beneficiary is named, a probate court will get involved to determine who receives the death benefit.
There are two types of IRAs: traditional IRA and Roth IRA. While the money in a traditional IRA is subject to income tax, the money in a Roth IRA is not.
Contributions to Roth IRAs have already been taxed, so withdrawals are tax-free. This means your heirs won’t have to pay taxes on the money you leave them in the Roth IRA.
Money inherited in an IRA must be withdrawn within ten years. However, there is no requirement to withdraw it earlier than ten years. That means your heirs could continue holding the money in the Roth IRA for up to ten years so it can continue to grow tax-free.
Non-qualified investments, such as stocks, bonds and mutual funds held in taxable accounts, can be passed on to your heirs. However, these have tax implications and capital gains to consider unless passed along the right way.
“The benefit of leaving taxable brokerage accounts to heirs is that the investments are generally easy to liquidate, and heirs receive a step up in basis at the owner’s death,” says Ashley Rittershaus, Certified Financial Planner (CFP) and founder of Curious Crow Financial Planning.
Rittershaus went on to say, “For a simplified example of how this works, let’s say you bought a stock in your taxable brokerage account for $30K, which grew to $100K. If you were to sell that stock, your basis is $30K, and you would owe capital gains taxes on the $70K growth. However, if you leave this stock to your heirs, they will receive a step up in basis to the stock’s value on the date of death, say $100K. If they sell the investment quickly, zero or minimal taxes will be due.”
Examples like Rittershaus gave are most benefitial for highly appreciated taxable investments, or in other words, investments with the most growth.
Real estate can be a valuable asset that appreciates over time. However, real estate is not liquid, so your heirs could only use the money if they sold or rented the property.
“Real estate can be many people’s largest asset and it also receives a step up in basis at death,” says Rittershaus. “Some people have the inclination to gift their house to their heirs prior to their death, which can be a mistake. Although there are good intentions behind this thought, if the house has appreciated in value, gifting creates a huge missed opportunity for heirs to receive a step up in basis.”
Instead, Rittershause suggests leaving an appreciated house to heirs at death rather than gifting during life. The reason is that heirs will likely save a significant amount in capital gains taxes in the event they were to sell the house.
It’s also important to remember that managing real estate can also be a great deal of work. Plus, there are extra costs involved from things like property taxes and maintenance that need to be considered.
Assets in a Trust Fund
Trusts are created to hold and distribute assets according to the person’s wishes. Having your assets in a trust means the assets can bypass probate court and are protected against money being diverted to creditors or a spouse during a divorce.
Trusts offer flexibility in managing various types of assets and can include specific instructions for distributions, such as education expenses or homeownership.
The Bottom Line
Creating an effective estate plan involves carefully evaluating various asset types to ensure your heirs receive the maximum benefits while minimizing potential conflicts and tax liabilities. Consider working with a financial advisor to develop a tax-efficient strategy for transferring assets to your heirs to minimize tax liabilities.
It’s also important to regularly review and update your estate plan to account for changes in your financial situation, family dynamics and applicable laws. By taking a proactive approach to estate planning, you can leave a lasting legacy that reflects your values and provides for the financial well-being of your heirs.
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