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Estate planning is the process by which you detail how accumulated wealth or assets are transferred to the next generation. Without a properly drafted and structured estate plan, your assets can become entangled between your heirs or lose significant value upon transfer. While the core principle of estate planning—designating beneficiaries—is fairly simple, an estate plan often includes more complex factors. Even a direct transfer to an heir may require detailed structuring and legal documentation.
You may think that estate planning is only for high net-worth individuals; however, estate planning is an important consideration for anyone that has assets they wish to pass on to the next generation.
Why is Estate Planning Important?
The current estate tax and gift tax exemption is $5.45 million for individuals, meaning that IRS estate taxes only apply to assets in excess of this amount. However, individuals with estates below the IRS threshold—the majority of estates—should still think about the impact taxation can have on transfers to heirs, because beneficiaries may be subject to ordinary income tax on the assets they receive.
There is a variety of strategies that aim to minimize the tax burden on beneficiaries and maximize capital transfer. Depending on your goals and asset types, you may wish to consider annuities, life insurance, trusts, and other mechanisms to protect the value of your estate. In some cases an estate planning solution may reap benefits for you while you are alive. As with other aspects of financial planning, what will work for you is tied to your specific situation. A good estate plan should function in concert with your overall financial and retirement objectives, hence it is crucial to consult with a financial professional that can account for the full spectrum of your financial life.