Inheritance tips: Death's certain. Taxes? Avoidable
— -- Financial planners, estate planners and other experts often quote this statistic: 70% of all inheritances are frittered away in the first three years. Here are some things to consider if you plan to leave an inheritance or expect to get one:
IF YOU WANT TO GIVE MONEY:(Go to: If you expect to receive money)
Even if you don't have a huge estate, there are ways you can leave money to your family or others that can save you taxes and make a big difference in their lives. Many people give money while they're alive to reduce the size of their estates — and estate taxes.
•You can give some money each year.
Each person can give $12,000 a year to any person — a child, another relative or the milkman — without having to file a gift-tax return with the IRS. If you have several children, you can give $12,000 a year to each. A married couple can "bundle" their gifts to give a combined $24,000 to each child ($12,000 per spouse).
Over your lifetime, $1 million in gifts is excluded from gift taxes. But any amount you give over $12,000 to one person counts toward that $1 million.
Time gifts for impact: For instance, a married couple could give a child $24,000 in December and $24,000 in January, says Michael Yoshikami, president of YCMNET Advisors in Walnut Creek, Calif. "That's a good chunk of a down payment for a house," he says.
•You can bequeath money after death.
Each person also has a one-time exclusion of $2 million from estate taxes after they die (the $1 million above is part of this). Combined, a married couple has $4 million that's excluded from estate taxes. If you want your heirs to be able to take advantage of the growth in assets you give them — and you're not sure they'd invest it wisely themselves — you can set up a trust to hold onto the money for any period of time.
If you leave $1 million using a will, the money would be paid soon after your death. By contrast, if you left it in a trust, it could grow to $2 million over time, doubling the amount your child could inherit without triggering estate taxes.
The $2 million exclusion is "a use-it-or-lose-it provision," says Richard Stone, CEO of Salient Wealth, a wealth management firm in San Rafael, Calif.
•You can pay for education.
If you want to pay education costs for your children, grandchildren or anyone else, you can fund a 529 plan or prepaid college fund. Money in such funds grows tax-free over time, and the proceeds are free of taxes — as long as the money is used to pay for education expenses.
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