NEW YORK (AP) — Death and taxes may be inevitable. A big bill for your heirs is not.
The wealthy have made an art of avoiding taxes and ensuring that their wealth is passed down effortlessly to the next generation. But the tricks they use — to speed up payments to heirs and avoid handing over money to the government — can also work for people with much more modest assets.
“It’s a strategic chess game played out over decades,” says Mark Bosler, an estate planning attorney in Troy, Michigan and legal counsel to Real Estate Bees. “While the average person relies on a simple will, the wealthy use a different playbook.”
First, consider the facts: Despite widespread misconceptions, only the estates of the wealthiest Americans are generally subject to taxes. At the federal level, estates over $15 million typically trigger taxes. At the state level, 16 states and the District of Columbia collect estate or inheritance taxes, according to the Tax Foundation, sometimes with lower exemptions than the IRS, but still at thresholds aimed at millionaires.
While most people can pass on what they have without worrying about their heirs getting caught in a web of taxes, it can take planning to avoid a messy process that can hold up estates for years and cost families significantly in court fees and attorneys’ bills.
The solution at the heart of many estate planners’ projects is a trust.
Although trusts conjure up images of complex arrangements used by the uber-wealthy, they are relatively simple tools that can make sense to many people. They come with expenses, often costing thousands of dollars in attorneys’ fees to set them up. But for a retired couple with a paid-off house, 401(k)s and an investment portfolio, they can make it easier to pass assets on to heirs.
Among the reasons: Even if you don’t leave enough behind to trigger taxes, your estate can be stuck in probate court, which typically assesses taxes based on the total value of the estate.
“Leave what might have happened to your children or other loved ones to the lawyers and courts,” says Renee Fry, CEO of Gentreo, an online estate planner based in Quincy, Massachusetts. “Anywhere from 3 to 8 percent of a fortune could be lost.”
Trusts can allow an estate to avoid court altogether and keep it out of the public eye by keeping the details in the public records. Some people also use them to protect their savings if they someday need nursing home care and would prefer to qualify for a government-paid stay under Medicaid instead of paying for it themselves.
Imagine you are an investor in a stock like Nvidia that has been rising for the past few years. Now imagine that you can get the profit of selling your shares without paying tax.