When it comes time to transfer what we’ve work so hard to accumulate, the way in which we transfer our wealth can have a big impact on how much of our wealth is actually received by our heirs and how much is transferred to the federal government.

Forbes’ recent article entitled “Top 7 Tax Mistakes Made in Planning a Wealth Transfer” says that tax mistakes can mean losing a lot of hard earned money, if you’re not careful. Here are some of the biggest mistakes made in wealth transfer planning.

1. IRD Taxes. Most people are unaware of this tax. It stands for “Income in Respect of the Decedent.” It’s the income tax your heirs will pay on tax-deferred assets, such as traditional IRAs, 401k’s and annuities. In many cases, these taxes will push heirs into a higher marginal tax bracket. You should plan to reduce or eliminate the IRD Tax, if you have a 401k, IRA or annuities. For example, if you gift IRA and 401k assets to charity and non-IRD assets to your heirs, you can save them in IRD Taxes! The use of a Charitable Remainder Trust can provide a tax-efficient way to create a “charitable stretch IRA” for your children or grandchildren.
2. Charitable Giving Mistakes. Most people do charitable giving with after tax cash from their income. However, this isn’t the most efficient way to give. Gifting highly appreciated securities, real estate, or even business interests can give you a double tax benefit: it can eliminate capital gains taxes and still get the charitable tax deduction.
3. Dying without a Comprehensive Estate Plan. About three-quarters of Americans die without a will. A will, by itself, subjects your assets (and your heirs) to probate. A well-designed estate plan can help reduce or eliminate both probate and estate taxes. Ask an experienced estate planning attorney about creating a comprehensive estate plan for you or review the one you have.
4. No (or Improper) Beneficiary Designations. This can result in a loss of inheritance for your family. With retirement accounts like IRAs or 401(k)s, properly designating beneficiaries is essential to avoid the loss of further income tax deferral at death. If you don’t have primary and contingent beneficiaries named on all your accounts, these assets will have to go through probate and could cost unnecessary IRD taxes.
5. Improper Titling of Business Interests. A business is frequently titled only in the name of the business owning spouse. However, when that spouse dies, the business itself must go through the costly process of probate, which can create issues for the operation of the company.
6. Bad Choices for Ownership & Beneficiary Designations on Life Insurance. Life insurance can be a great financial planning tool and provide liquidity. It can also be a great wealth transfer tool in estate planning or business planning. However, if the ownership and beneficiaries are done incorrectly, the life insurance benefits can be subject to estate taxes. Ask an experienced estate planning attorney about an irrevocable life insurance trust (ILIT).
7. Giving the Wrong Assets to your Heirs. A common mistake that people make in wealth transfer planning, is to leave a percentage of their estate to their children, another to their grandchildren and another to their favorite charities (or Donor Advised Fund) in their will or via a trust. However, this isn’t the smartest way to distribute your assets from a tax perspective. Doing so could subject them to IRD taxes. Instead, use IRA (and other IRD assets such as 401k) for your gifts to charity and, give non-IRD assets (such as cash, real estate, life insurance, or a Roth IRA) to your children and grandchildren.

One of the main goals of our law practice is to help families like your plan for safe, problem free, and successful transfer of assets to the next generation.  Call our office today to schedule a time for us to review your estate plan and identify the best strategies for you and your family to ensure your legacy of love and financial security.  Our office is located in Santa Ana, CA but we serve all of California including Irvine, Orange, Tustin, Newport Beach, and Anaheim.

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Reference: Forbes (Dec. 15, 2021) “Top 7 Tax Mistakes Made in Planning a Wealth Transfer”