Regardless of how much wealth you have, having some type of estate plan and financial power of attorney are the financial building blocks to make sure your assets go where you want them to go.
Between life insurance, wills and other financial tools, many parents of average income can also take steps to make sure their children will be okay financially after they’re gone.
Prepare a Will
The will states your final wishes regarding who will or will not receive from your estate, name guardians for your minor children, state directions regarding organ donation and burial.
Your estate consists of everything you own. This includes but is not limited to: home, investments, and family heirlooms.
The will will be used to name an executor, or the person responsible for paying final bills and dividing up the estate.
The downside to a will is that it has to go through probate, a court process that is both lengthy and costly. Creditors will be paid out prior to those beneficiaries named in the will.
Create a Trust
The trust will allow a parent to control from the grave. The assets will be owned by the trust, which will be controlled by the person who created it until they die or become incapacitated (the parents). Once the person dies, the trust would be handed to a successor trustee who can control the trust and use the funds to pay bills and later to divide the assets among family members.
A trust does not have to go through probate. The assets will be distributed based on the document and will not have to go through court proceedings. It is more expensive to form than a will, but there are many advantages.
Leave children your retirement accounts
Easiest way to ensure that your children will receive your retirement savings is to name them as the beneficiaries to your accounts such as 401(k), traditional IRA and Roth IRA.
Make sure beneficiary forms are kept up to date, since those designations would trump whatever is in the will.
People inheriting traditional IRAs will also have to take minimum required distributions, based on their age and life expectancy. Like the original owner, they’ll owe taxes on the money when they take distributions.
Beneficiaries inheriting a Roth IRA, which is funded with after-tax dollars, do not have to pay taxes on the savings as long as the account has been open for at least five years.
Buy life Insurance
The purpose of life insurance is to make sure people who rely on you financially will be protected. Many parents don’t purchase the correct policy, causing the money to run out sooner than they expected.
When purchasing life insurance, couples should factor in mortgage payments, college costs, food and other expenses and estimate how much their children would need to cover those expenses until they reach adulthood.
Parents might want to save on taxes by placing the life insurance policy into an “irrevocable life insurance trust”. Proceeds of the insurance would go into the trust and not be counted as part of parents’ estate.
If the child is named as co-trustee after reaching a certain age, the money will be protected from creditors and will not have to be shared with a spouse if the beneficiary gets divorced
A 529 account, allows money to grow tax-free until it is used to pay for qualifying college expenses. Parents or grandparents can contribute up to $14,000 a year per child (or $28,000 a year for a couple) before having to pay gift taxes.
There is an exception that allows people to front-load up to five years worth on contributions for the next five years. The children may not have much left after paying for college expenses, but if they do, they can choose to pass on funds to pay for higher education costs for their own children.
If you live in Miami-Dade, Broward, or Palm Beach counties it is time to start preparing your estate-planning portfolio. Make sure your children are taken care of when you are gone. You can’t predict the future, but you can plan for it.
Contact an experienced estate-planning attorney at The Hershey Law Firm, in Fort Lauderdale, Florida, at (954) 303-9468 to discuss your estate planning needs.