Don’t Overlook Legacy Planning
Don’t Overlook Legacy Planning
Legacy planning involves strategies for efficiently passing assets to heirs or beneficiaries. It is often one of the most overlooked aspects of financial planning. Understanding how different assets pass to beneficiaries can save taxes, fees and time.
In Ohio, you should not assume all assets will pass to your spouse or children if both are present, especially after a remarriage or divorce. A will is a basic but important part of estate planning. For people with minor children, a will allows them to select guardians rather than relying on the state to make that decision. It also allows individuals to express their wishes to Probate Court regarding which people or entities should receive their assets. A will does not bypass probate but provides instructions for how the process should proceed.
As a general rule, most financial planners suggest having as few assets as possible pass-through probate to avoid delays and fees. For many assets, this can be done at no cost. Making sure retirement and investment accounts have beneficiaries listed allows those assets to pass directly to the beneficiaries.
Individual or nonqualified investment accounts receive a “stepped-up basis,” meaning beneficiaries receive the assets with a cost basis equal to their value at the time of death. This can allow beneficiaries to inherit those assets with no or low tax consequences. Roth accounts, such as Roth IRAs, are inherited without taxation.
Deferred investment accounts, such as traditional IRAs and pretax 401(k)s, are among the least tax-efficient assets to leave to beneficiaries because withdrawals are subject to ordinary income tax. For this reason, many planners suggest retirees spend those accounts down first during retirement.
A life insurance policy payout is one of the most tax-efficient assets to pass to a beneficiary because it can bypass probate and the death benefit is typically tax-free, assuming the owner and insured paid for the policy personally. Additionally, the death benefit is generally purchased at a fraction of its eventual value.
Bank accounts are often frozen upon death until probate is complete. A payable-on-death (POD) designation can help avoid this. Joint account ownership, such as between a husband and wife, can also prevent an account from being frozen.
For higher-value estates and families with special needs, trusts are powerful estate planning tools that can direct assets to beneficiaries without probate. A well-written trust can also control how money is distributed long after death. For example, if a parent feels their children are not mature enough to receive an inheritance in a lump sum, a trust can spread the distribution over a specified period, allowing beneficiaries to develop financial responsibility as they grow older.
A complete financial plan incorporates investment, tax and estate planning. I recommend that your financial planner, CPA and attorney work together to ensure your wishes are carried out efficiently.
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Disclaimer: Crosby Advisory Group, LLC is a registered investment advisor. This newsletter is for general knowledge and is not intended to be individual investment advice. Investing involves risk including potential for loss. Understand all risk and fees before investing. NMD Insurance is affiliated with Crosby Advisory Group, LLC.
