Leave Money to Your Heirs Before You Die

Many individuals in Fairfax, VA equate estate planning with the drafting of wills and the distribution of wealth after death. However, the scope of estate planning goes well beyond after-life preparations. An experienced estate planning attorney can show you how best to distribute your wealth while you are still alive—and in a manner that can reduce the overall tax impact.

There is a common misconception that the best way to distribute your assets is for them to be split among your survivors in a large lump sum after your death. While that is certainly one way that it can be done, it's almost never the most efficient. Oftentimes, a significant portion of the inheritance is devoured by estate taxes—giving your beneficiaries much less than you originally intended. Estate planning attorneys will often recommend that you distribute some of your assets while you are still alive.

Here are three ways that you can transfer money to your beneficiaries and avoid the gift tax:

1. Under federal law, you can transfer up to $13k in cash or other assets per person and not have to pay a gift tax. If you transfer more than $13k, the excess will be taxed under the IRS gift tax guidelines. So, if a Fairfax man has planned to leave $100k to his son, it would be beneficial from a tax standpoint to start transferring the money to him at the rate of $13k per year. If the father dies after five years, $65k would have been transferred without a tax penalty. Only the remaining $35k would be subject to estate taxes (as opposed to $100k).
2. You may give an unlimited amount of money to a medical or educational institution that provides a service for another person. An example of this would be an Alexandria, VA grandmother who decides to pay for her granddaughter's college tuition instead of holding her money until she dies. Using the same sum of $100k, if the grandmother were to pay a $25k per year tuition for four years, none of the granddaughter's $100k "inheritance" would be taxed. If the grandmother simply bequeaths the money in her will, it will be subject to estate taxes.
3. You may avoid paying taxes by giving to a tax-exempt charity. The law allows you to fund a charity in a number of ways without the payment of taxes. Charitable gift funds offered by large investment firms allow you to manage your investments, grow the funds, and then allocate those funds to your favorite charities without their being subject to estate taxes. You can also avoid taxes by funding charities directly from the unused portions of your tax-deferred retirement accounts (IRAs, 401ks, et cetera) upon your death. For example, if a testator wishes to leave $100, 000 to a local Fairfax charity, he or she can fund it directly from an untapped Roth IRA and avoid it affecting the rest of the estate. Furthermore, that $100,000 is transferred free of tax free.

These are just three examples of how an estate planning attorney can assist you in avoiding estate taxes. While it's not always possible to avoid taxes, a qualified Virginia estate planning attorney can help you develop an optimal plan to reduce the tax impact on your estate.