Death is not something anyone likes to talk about, yet it’s an unavoidable part of life and something you must prepare for, especially when you have people who depend on you financially. Suppose you spent your whole life working to have enough to provide yourself and your family with a comfortable living and accrued a substantial amount in assets. In that case, it’s important that you consider what will happen to those assets when you pass away.
You can pass on all this wealth to the people you love and trust so they can keep living the same comfortable life they had when you were still there. But passing on your assets to an heir can be challenging and can easily become a nightmare for your heirs if done incorrectly. As such, here are some simple ways to transfer your assets to an heir when the time comes.
Invest in an IRA or 401(k)
One of the most widely recommended way to invest into a tax-free retirement is through IRAs and 401(k)s. IRAs and 401(k)s are both tax-deferred retirement savings offered by employers, giving them the freedom to match an employee’s contribution. If you are currently working for a company, you can make arrangements with them to learn more about how you can maximize your potential with an IRA or 401(k) investment.
Investing for retirement in a retirement account will help you enjoy your golden years travelling the world, sending and receiving you mail abroad on a beach in the Carribean while sipping margaritas.
But these types of retirement accounts are also a good way to pass wealth down to your heirs because it offers them several different options for cashing in these savings. For example, if you are listing your spouse as the main beneficiary of a 401(k) or an IRA, they are entitled to several options by the time the asset’s ownership has been handed down to them:
- They can roll the inherited 401(k) to their own 401(k) or IRA
- he can do a direct transfer of the funds from the 401(k) account to the inherited IRA
- Enter a lump sum distribution scheme, or
- Leave the asset as it is, so it keeps growing.
Depending on which path they choose, they might incur some costs in the form of income tax or penalties.
If you designate a person who’s not your spouse, the same rules apply, only they will not be able to leave the inheritance as it is indefinitely, but for a maximum of 10 years. After that, they will need to withdraw it to abide by the 401(k)’s 10-year rule.
Buy a life insurance policy
If saving up for the lives of the people you cherish the most is one of your main goals when acquiring wealth, then getting life insurance is a great option. It makes everything much easier from your heirs’ perspectives.
A full life insurance is much more desirable as it secures a better future for your heirs. At the time of your death, your life insurance’s proceeds, which will then be transferred to your beneficiaries, will no longer be subject to income tax, which makes it an appealing investment option. Additionally, permanent life insurance has the potential for tax-deferred growth, mainly when it’s bought with pre-tax dollars.
Get into crypto
Cryptocurrencies are the biggest thing in the financial industry today, and they’re slowly cementing their image as the future of money. One of the biggest cryptocurrencies, Bitcoin, has been acquiring a lot of supporters through the years, making one bitcoin today worth almost $20,000. If you plan to invest in crypto in the hopes of leaving a valuable inheritance for your family, you can look into several options to hand them down safely.
One of the most common ways of transferring this type of digital wealth is through the acquisition of custodial solution services from certain exchange companies like Coinbase or Binance. They work similarly to banks and brokerages, only that they specialize in securing digital assets like crypto. On the other hand, while these platforms have established a brand for safekeeping your crypto assets for an inheritance, you should still consider the possibility of your wealth being exposed to cyber-attacks.
If you don’t feel safe sharing your digital assets with a third-party platform, you can also transfer your wealth to a beneficiary through the use of a digital wallet such as Trezor or Ledger, which has the same function of keeping your cryptocurrency safeguarded digitally. With this method, you can rely on the relationship you have with your beneficiary, as this will require you to give them your private key, and in the world of crypto, “My key… my crypto.”
Invest in real estate
You probably already own a house that you’ll pass down to your loved ones, but if you also have a huge sum of money you still haven’t found a way to transform into an inheritance, investing it in real estate could also be a viable solution.
A house is one of the most versatile forms of wealth that you can pass on to your heir–they can accept it as it is and use it for themselves, sell it for a considerable amount of cash or even rent it for a stable source of passive income. And even if they decide to sell, they might not be obliged to pay for the capital gains tax on the house.
However, one of the biggest caveats of using a house as an inheritance is the indirect costs your heir might have to assume when they receive the property. These costs are commonly attributed to maintenance as well as taxes, and they can seriously add up.
This only partially negates the benefits of using a home as a form of inheritance, so you can definitely include it as a way of handing down your wealth.
Grantor Retained Annuity Trusts (GRAT)
If you have children you want to pass down wealth to, a Grantor Retained Annuity Trust is a good choice. As the name of the trust suggests, you, as the grantor, will still receive your annuity payments from the trust. But if you pass away early, before consuming all your principal, the remainder from the trust can be distributed to the beneficiaries, in this case, the children.
In an ideal setting, the assets contributed will appreciate over time, and the amount of distributable trust for your heirs will be larger than the combined values of the grantor’s payment over the term. One of the best things about GRATs is the possibility of allocating a more significant portion of your estate to your children, reducing the amount you have to pay in estate taxes.
Additionally, the current interest rates stand below 3%, which makes it more likely that the assets you put in your GRAT will grow faster than by earning interest in a savings account. This creates the same positive effect of a bigger allocation of tax-free assets for your children.
Another benefit of investing in a GRAT is you are essentially paying the income tax on the GRAT assets, so, the payment is not considered a taxable gift or inheritence.
Save your money through UTMA or UGMA accounts
UTMA and UGMA stand for Uniform Transfers to Minors Act and Uniform Gifts to Minors Act respectively, which both have the similar function of being statutory custodial savings accounts for beneficiaries who are not yet of legal age. As a general rule, the child to which the savings are meant to be enjoyed will only have full ownership of the funds by the time they reach the legal age, commonly at 18 or 21 years old, depending on where you live.
The notable difference between a UTMA and UGMA account is that the former is more flexible and can accommodate any type of asset, whereas the latter can only cater to financial assets such as cash and various forms of securities.
If you want to manage your inheritance directly, you can do it with either a UTMA or UGMA account. Otherwise, you can hire the services of a custodian.
Among the other benefits you and your beneficiaries can enjoy under this manner of wealth distribution is how easy it is to set a UTMA or UGMA up. Unlike the other aforementioned methods, you will not need to seek any legal help in establishing a UTMA or UGMA account. There is also no limit as to how much you would want to contribute to these types of accounts. Because the funds are technically under the ownership of the child, it is expected that the tax rates are much lower compared to when the assets are hel in the parent’s account.
529 College Savings Plans
Another method of distributing your wealth to an heir who happens to be a child is through the 529 College Savings Plan, which is a state-run savings plan that entitles you, as well as your beneficiary, to a variety of benefits. One good thing about this manner of handing down your wealth is that, depending on the policy of your state relative to the 529 Savings Plan, your account might be entitled to either a partial or full tax deduction for contributions.
Additionally, you can also change the person who you want to be the beneficiary of the savings or set up a set of plans dedicated to the same beneficiary if you ever need to. You are also given the power to manage the fund on your own, as the account will be under your name, not your child’s or beneficiary’s. Lastly, as the owner of the account, 529 Savings Plans allow you to contribute high-valued assets with no income limitations, as well as any discouraging impact on financial aid eligibility.
The Bottom line
Whether you are expecting to pass away soon, in a few years or in a couple of decades, being aware of what you will leave behind for your family is something that you must consider and plan for. The value of the wealth you leave behind is only a single factor to look into, as you must also plan for the manner in which your beneficiaries can enjoy it. No matter how valuable this inheritance may be, it won’t be worth a dime if your heirs don’t have access to it or cannot claim their rightful ownership of it.
In this regard, looking into a variety of ways in which you can pass down your wealth is a clever way of leaving a legacy for your children and heirs. Life after death starts when the people around you start living without your presence, but it does not mean that you cannot do anything to make things easier for them.
By properly managing your wealth while you are still alive, you will secure a future for them that may free them of any financial worries, making their loss that much more manageable.