Build a Legacy with Estate Planning in Danvers, MA
Think about how hard you’ve worked to support your family and build a nest egg for retirement that will be passed down to the next generation of your family. A comprehensive estate plan should be in place to ensure that your hard work and discipline are protected.
Without a current plan, you risk your estate going through a lengthy and costly probate process, during which your loved ones may or may not be the ultimate beneficiaries of your hard work. No one wants that for their family!
An estate plan serves three purposes: How to protect assets, transfer assets, and minimize taxes. Using tools like trusts, beneficiary designations, and powers of attorney, you can ensure your wealth is managed according to your wishes, shielded from unnecessary risks like probate or legal challenges, and protected if you become incapacitated.
At the same time, an estate plan incorporates several tax strategies to benefit you and your heirs. For heirs, it can reduce estate taxes, leverage the step-up basis for appreciated assets, and use trusts for tax-efficient wealth transfers.
Charitable giving strategies, such as annual gift exclusions and business succession planning, can lower a person’s taxable estate and provide financial benefits during both spouses’ lifetimes.
Read our latest Quick Guide: Comprehensive Financial Planning in Danvers, MA
In today’s blog article, we’ll look at the top five tactics for individuals and families with more than $500,000 of investable assets that will be part of your estate plan in Danvers, MA. At Sherr Financial Associates (SFA), our team of Danvers AIF® financial advisors can assist you in developing a custom-tailored financial plan that supports the strategy in your estate plan.
Establishing a Revocable Living Trust
How It Works: A revocable living trust ensures your assets are managed and distributed according to your wishes without going through probate. This keeps your financial affairs private and speeds up the asset transfer process after you and your spouse are gone.
Example: A couple with $750K in investment accounts and a vacation property transfers these assets into a revocable living trust. Upon their passing, the trust ensures the accounts and property pass directly to their heirs without delays or public scrutiny.
Leveraging Annual Gift Tax Exclusions
How It Works: The IRS allows you to gift up to $18,000 per recipient annually (2024) without triggering gift taxes. This allows you to reduce the size of your taxable estate while passing wealth to the people you care about.
Example: A grandparent with $1 million in assets gives $18,000 to each of their three grandchildren annually to help cover school expenses, effectively transferring $54,000 tax-free. This reduces their taxable estate while helping fund the college educations of family members.
Utilizing a Grantor Retained Annuity Trust (GRAT)
How It Works: A GRAT allows you to transfer appreciated assets to heirs with minimal tax consequences. You retain income from the trust for a set period, and any remaining asset growth passes to your beneficiaries tax-free.
Example: You invest $500K in a GRAT in high-growth stocks. After the GRAT term ends, the stocks are worth $750K. The $250K in growth is tax-free to your heirs, while you retain the original $500K in annuity payments.
Converting Traditional IRAs to Roth IRAs
How It Works: Roth IRA conversions enable you to pay taxes on your retirement savings now rather than when you make withdrawals. This benefits your heirs because Roth IRA distributions are tax-free, and there are no required minimum distributions (RMDs) during your lifetime.
Example: You have $250,000 in a traditional IRA and want to convert it to a Roth IRA. We assume you are currently in a 24% tax bracket.
Converting $250,000 from a traditional IRA to a Roth IRA in the 24% tax bracket adds $250,000 to your taxable income, resulting in $60,000 in taxes owed.
Paying this tax from outside funds preserves the full $250,000 in the Roth IRA, which grows tax-free. Over 20 years, at a 6% growth rate, the Roth IRA would grow to $800,000, which is tax-free when you withdraw.
By contrast, leaving the funds in a traditional IRA would also grow to $800,000, but withdrawals would be taxed, resulting in $192,000 in taxes owed at a 24% rate. A Roth conversion creates immediate tax expenses but can save you up to $132,000 in future taxes in this scenario while ensuring tax-free growth and distributions.
Incorporating Charitable Giving Strategies
Charitable tools like donor-advised funds (DAFs) or charitable remainder trusts (CRTs) can reduce your taxable estate, provide immediate tax deductions, and support causes important to you, especially if you have $1 million or more of investable assets.
Donor-Advised Funds (DAFs)
How It Works: A Donor-Advised Fund is a charitable giving account that allows you to donate assets, receive an immediate tax deduction, and recommend grants to charities over time.
Example: By contributing $100,000 in appreciated stock to a Donor-Advised Fund (DAF), you can receive an immediate $100,000 tax deduction and avoid capital gains tax on $50,000 of appreciation, saving $7,500 (15% rate).
The funds grow tax-free within the DAF, and you can recommend charity grants over time. For example, you could distribute $10,000 annually for a decade while the remaining funds grow tax-free, enabling you to make bigger gifts in the future.
Charitable Remainder Trusts (CRTs)
How It Works: You create and fund a CRT with an appreciated asset, such as $500,000 of stocks. The trust sells the stocks tax-free, avoiding capital gains taxes. The CRT pays you (or another beneficiary) an income stream for a specified term or the lives of both spouses. The payout is expressed as a percentage of the trust’s assets, typically 5–8% annually. The remaining assets go to your designated charity at the end of the trust’s term.
Example: You own $500,000 in stocks purchased for $250,000. You donate the stocks to a CRT. You avoid paying capital gains tax on the $250,000 gain, saving $37,500 (15% rate). The CRT pays you 6% (about $30,000 annually) for 20 years, totaling $600,000 in income. You receive a partial tax deduction upfront based on the expected remainder value going to the charity, which might be approximately $150,000.
How Sherr Financial Associates (SFA) Can Help with Your Estate Planning Needs
At Sherr Financial Associates (SFA), we focus on crafting highly personalized strategies to help protect your wealth and align with your family’s interests.
This includes establishing clear governance structures, like family mission statements, to guide future decision-making and reflect shared values. We also coordinate estate planning with your broader financial strategies, such as investment management and insurance, ensuring all aspects work together seamlessly.
Whether focused on supporting local causes, funding education, or creating a family foundation, SFA provides the knowledge to align your philanthropic and financial goals with sophisticated estate planning solutions.
Connect with us to learn more about our wealth management solutions.
This material is intended for informational/educational purposes only and should not be construed as tax/legal/investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.
Sherr Financial Associates does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.
The scenarios used in this material are hypothetical examples and are for illustrative purposes only. No specific investments were used in these examples. Actual results will vary. Past performance does not guarantee future results.
