Beyond the Will: How to leave the most behind when you die

All of us will eventually die, and we generally want to leave something good behind for our loved ones.

As morbid as it sounds, putting some planning now into your legacy after death can help ease the burden on your family.

Proper estate planning can mean the difference between your assets and cash going to your children or grandchildren when you die, or to the government. 

The IRS will still get its share (of course), but there are things you can do to ensure they get as small a piece of the pie as they legally can.

To leave instructions for these things, as well as others, it’s important to make a will and keep it updated after any significant life events.

Taxes after death

As unfortunate as it sounds, the truth is that even after you die, you will still owe some taxes. 

These can take a few different forms: income tax, estate taxes, and inheritance taxes.

Income tax

Envato/witsaruts

Since tax for the year’s income is not calculated and paid until the following year, someone who dies during the year may still owe taxes on their income that year.

Depending on how much money you made during the year, a family member may have to file a final tax return for you.

How much this tax bill will be depends on the amount of money you earned during the year. 

This is one reason it’s smart to plan for retirement using Roth IRA’s – money you withdraw from a Roth IRA account is not taxable after you’re over 62. 

Estate taxes

Estate taxes, also known as “death taxes”, are a tax on a person’s assets that they leave behind after they die, and before these items go to whoever is inheriting them.

Thankfully, death taxes are pretty rare – your estate needs to be worth at least $12.9 million for it to owe estate taxes.

Envato/Pilat666

If you’re hardworking and lucky enough to leave an estate this size, you can plan ahead to reduce the size of your estate before you die.

This can be done with nontaxable charitable donations or gifts to family during your lifetime.

Inheritance taxes

Inheritance taxes are similar to estate taxes, except that they are paid by the person who inherits what you leave, instead of being paid by the estate.

Only six states in the US have an inheritance tax, and again, it’s something that will only be paid on very large inheritances. 

In order to avoid inheritance taxes, you can either live in a state that doesn’t collect this tax, or work with a lawyer to put your property in a trust with a beneficiary.

Trusts can usually be passed from person to person more easily than direct transfer of property.

Businesses

Envato/ckstockphoto

Many people start a business during their lifetime and want to leave it to their children.

Even if the children don’t want to continue with the business themselves, it can be a valuable asset to sell or turn over to a manager.

However, because a business represents a significant chunk of value, it can trigger an estate tax.

On the other hand, if the business is its own corporation, you don’t “own” it – it owns itself.

This can make it much easier to transfer the corporation to a new manager or CEO without paying inheritance or estate taxes. 

The same can go for other assets, such as real estate or other investments.

If these items can be owned by a corporation or LLC rather than by you directly, ownership or management can be transferred to a new person without the value of the assets transferring directly.

Life insurance

The final piece of the inheritance puzzle is life insurance. Now, there are many different flavors of life insurance floating around out there, but this is the bottom line:

Envato/Rawpixel

Life insurance is a financial product that transfers a sum of money to a beneficiary (usually a spouse or child) after the insurance holder’s death.

In fact, a better name for it might be death insurance! 

Generally, you do not benefit yourself from life insurance, like you do from health or home insurance. Instead, the money goes to someone else. 

Life insurance is more important if you support other people in your life, such as a spouse or children, who would suffer if they lost the money you make.

If you don’t have these people in your life, life insurance is less important. 

Life insurance taxes

Of course, there are taxes on life insurance too.

If the life insurance payout on your death will be very large, it’s best to structure it so that the insurance money goes into a trust, which then goes to the beneficiary.

Envato/ijeab

This will help them avoid paying undue amounts of tax on the money. 

The bottom line

Everyone’s situation is different, and we’ve only looked at the basics here. 

When large sums of money are involved, it's best to consult a qualified financial planner.