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Your Final Invoice

Grandma overlooking children fighting over her treasure chest

You know the saying, “The only two things certain in life are death and taxes.”

The good news is, while preparing for the first, you can reduce the burden of the second — both on yourself and your heirs — through careful financial and estate planning. What’s more, with just a few considerations you can avoid paying for unnecessary funeral expenses — your final invoice.

Trimming the Tax Bill

While many people worry about the Federal estate tax, it applies only to high-net-worth individuals. In 2019, it was levied just on assets in excess of $11.4 million. Certain states also impose separate estate taxes, but those, too, generally apply only to high-net worth individuals.

Unfortunately, most people don’t realize that other taxes are far more likely to take a large chunk — in some cases, up to 70 percent — out of assets they leave to their loved ones. And those taxes apply to just about everyone, regardless of financial status. Here’s just one example:

You have a retirement plan valued at $10,000, and a savings account also valued at $10,000. You want to leave $10,000 to your favorite charity, and the other $10,000 to your child.

Whether you leave the charity the retirement plan or the savings account makes no difference to the charity: They are able to keep the full $10,000 either way, since income tax does not apply to the receipt of a retirement plan or a savings account by a charity.

If you leave the $10,000 savings account to an individual, they will receive the full $10,000 without an income-tax reduction. However, if you instead leave the $10,000 savings account to the charity and leave your $10,000 retirement plan to your child, your child will end up with less than $10,000, since income tax must be paid on retirement plan distributions received by an individual.

The portion of the funds that your child loses to taxes could be substantial, depending on his or her income tax bracket and how quickly the funds are distributed from the retirement plan. Add in probate costs and the losses will climb even higher.

This is just one of the many reasons that it’s important to meet with a certified financial planner, or CFP, to help you decide on a money-saving strategy that’s right for you and your heirs.

Use Planned Giving Strategies

Trusts, life insurance, charitable gift annuities, charitable donations, donor-advised funds, even outright gifts to friends and family members are all strategies that can reduce the tax load on your assets. And some trusts can even help you avoid probate completely, eliminating unnecessary costs. Learn how these work.

Plan ahead — otherwise your good intentions could fall flat.

Family comes first. But remember charities and causes you believe in.

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