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847-944-9400When considering estate planning, it’s essential to carefully select assets that can provide lasting value to your heirs. From cash and cash substitutes to brokerage accounts and assets in a trust fund, there are several options to consider when planning your legacy. Illinois residents looking to secure their financial future and provide for their loved ones should carefully consider these valuable assets as part of their inheritance planning strategy.
1. Cash
Cash is one of the simplest and most straightforward assets to leave as an inheritance. It provides a clear value that is easily divisible according to the terms of a will. Unlike assets such as real estate, which can take months to sell, cash requires minimal effort from heirs to access. This simplicity and ease of management can provide a sense of reassurance and confidence to both the giver and the receiver.
Consolidating cash savings from different banks can be a strategic move for Illinois residents, especially in later retirement years. This approach not only streamlines the transfer process by reducing the number of accounts but also ensures that federal insurance limits are met, securing bank deposits.
For instance, the FDIC insures up to $250,000 in individual deposit accounts, and a similar protection applies to credit union members. Moreover, heirs can benefit from seeking financial advice when receiving a large cash inheritance, as their financial needs and goals may differ significantly from those of an older relative. Professional guidance can help them manage the funds wisely, ensuring a secure financial future.
2. Cash Substitutes
Certain financial products can serve as effective alternatives to cash for Illinois residents. Life insurance, for instance, provides a death benefit to heirs in cash, bypassing probate. Heirs don’t have to wait for the courts to process the will before receiving the funds. The process is typically simple, requiring only a death certificate and a short form. Bank products like money market accounts and certificates of deposit (CDs) also provide liquid assets that heirs can quickly divide and cash out. Adding ‘payable upon death’ (POD) instructions to bank accounts ensures they bypass probate as well. This option is often safer than adding an heir as a joint account owner, which could lead to complications while you’re still alive. The simplicity of these processes ensures that heirs can quickly access their inheritance, providing them with financial security.
It is essential to carefully plan and review the beneficiary instructions for life insurance and POD accounts, as these pass by contract, not by will. Even if your will states something different, the named beneficiaries on these accounts will receive the funds according to the account beneficial designations. Regularly reviewing these instructions can help avoid unintended consequences, such as leaving money to an ex-spouse or missing an opportunity to add new family members. This practice ensures that the funds are distributed according to your wishes, providing peace of mind.
3. Brokerage Accounts
Investments in taxable brokerage accounts, such as stocks, bonds, and mutual funds, can also be excellent inheritances for Illinois residents. These are easy to value and divide because the market price of publicly traded investments is readily available, and they are typically simple to sell and convert into cash.
In addition to being easy to manage, heirs may benefit from a favorable tax situation with these assets. If an individual holds onto investments until death, the heirs may benefit from a ‘step-up-in-basis.’ This means the investment’s cost basis resets to the market value on the date of death, potentially reducing or eliminating capital gains taxes when the asset is sold.
This tax advantage can also apply to real estate, although property can be more complicated to manage and may lead to disagreements among heirs. One way to simplify this is by instructing the executor of the will to sell the property immediately after passing, allowing heirs to receive cash from the sale without the burden of capital gains taxes.
4. Assets That Quickly Decrease in Value
For Illinois residents who may face estate taxes at death, a strategy involves purchasing depreciating assets, such as expensive cars or boats, toward the end of life. These items lose value quickly, which can reduce the estate’s taxable value. Buying these assets and leaving them as an inheritance could reduce the amount your heirs owe in estate taxes. This approach could be particularly beneficial if the estate tax exemption decreases in the future or if you live in a state with estate or inheritance taxes.
Buying these assets and leaving them as an inheritance could reduce the amount your heirs owe in estate taxes. This approach could be particularly beneficial if the estate tax exemption decreases in the future or if you live in a state with estate or inheritance taxes.
5. Roth IRA
A Roth IRA can be one of the most tax-efficient assets for Illinois residents to leave behind. Contributions to a Roth IRA are made with after-tax dollars, and the principal and any investment gains can be withdrawn tax-free. This favorable tax treatment extends to heirs who inherit a Roth IRA, making them feel financially savvy and strategic in their inheritance planning.
In contrast, traditional retirement accounts like 401(k)s or traditional IRAs require heirs to pay taxes on withdrawals. Heirs must also withdraw all funds from these accounts within ten years, which could push them into a higher tax bracket.
Suppose you have both types of retirement accounts. In that case, you should prioritize spending down taxable accounts during retirement or using them for charitable donations, leaving the Roth IRA as an inheritance. Another option is converting a traditional IRA to a Roth IRA during your lifetime, paying taxes upfront to leave a tax-free account to your heirs. However, this strategy may not always be the most tax-efficient option, as the upfront tax payment could significantly reduce the value of the inheritance. It’s essential to weigh the potential tax savings against the immediate tax cost.
6. Assets in a Trust Fund
Rather than leaving assets directly to heirs, setting up a trust fund to manage the inheritance can provide a layer of protection for Illinois residents. This can protect the inheritance from creditors and individuals trying to claim part of the estate, such as a spouse who may file for divorce or seek to spend the inheritance in ways that weren’t intended.
A trust can also help protect heirs from themselves. If you worry that an heir might spend too quickly, you can set up terms in the trust to distribute the funds over time. Additionally, trust funds can be used as part of a broader estate planning strategy to reduce taxes. Transferring assets to a trust while you’re still alive may not include any future appreciation of those assets in your taxable estate.
Additionally, trust funds can be used as part of a broader estate planning strategy to reduce taxes. Transferring assets to a trust while you’re still alive may not include any future appreciation of those assets in your taxable estate.
With thoughtful planning and the right assets, Illinois residents can significantly reduce complications and financial burdens for their heirs while ensuring their wealth is distributed according to their wishes.
Gardi, Haught, Fischer & Bhosale can help with your estate planning questions and concerns. Contact our estate planning attorney, Ann Fischer, today. Request a free consultation below or by calling 847-944-9400.