When we build up wealth over a lifetime, there becomes a need to protect it, so when we pass away it doesn’t make its way into the wrong hands, eg. taxes. There are strategies that are often missed that we can set up for our loved ones to make their own stress far less when we’re gone.
Plan Your Estate
One extreme example of a huge lack of planning was the musical genius Prince, who died unexpectedly without even making a will to determine what would happen to his estate. With a $200 million estate, it was estimated that nearly half would go to taxes, between the IRS 40% estate tax (estates worth less than $5.45 million are not subject to this tax), plus Minnesota’s 16% estate tax (not all states have an estate tax). These percentages decrease the smaller the estate is.
Now, all of this could have been avoided and a LOT of money could have been saved for Prince’s large family if he had taken a little time to plan out some things.
The most common planning most of us do is create a will, using a legal online site, or if you’re worth a bit more, using an estate attorney. One issue with this that most people don’t consider is the fact that this will go through something called probate, which brings court time, attorney fees, and can take many months. Because of the court process, this becomes public record.
Also known as a revocable trust, this may be an alternate route to a will for some people. For one, a living trust does not go through probate, saving money, time, and privacy. However, a strategy is necessary to ensure you put your assets under the proper name to shelter your wealth from taxes as much as legally possible.
In some circumstances, it may still be necessary to write a will for things not covered by a trust, like naming guardians for minor children and limiting the time any creditors can file a claim on the estate. Fees for a professional trustee are often much less than fees for a professional will executor.
Have legal agreements in place from the beginning
Whether this applies to an attorney, a business or investing partner, or any sort of agreement with anyone, make sure you both understand the expectations going forward, just in case the relationship doesn’t end well. Remember your roommates in college and how you all never got around to writing down house rules/chores? Unless you’re the proactive one, likely things didn’t go well at least once until you learned better – leave that one time as your life lesson!
Have great team members
Do the people you work with hold you back or are they accelerating your wealth-building? Make sure they have the expertise you need to keep you moving without expensive mistakes.
The majority of the tax code is written to help you reduce your tax burden. If you’re married, in the 25% tax bracket making $75,300-$151,900/year, that’s essentially working two hours every single day to pay those taxes… Planning out a strategy for your taxes helps you legally reduce your taxes AND will have you very well prepared in case of an audit.
Have a wealth strategy
The idea of building wealth can be very exciting, and if you’re like me, writing out a strategy for this can be just as exciting, and in the long run, this solid foundation can save you years of wasted progress.
“A part of all I earn is mine to keep.’ Say it in the morning when you first arise. Say it at noon. Say it at night. Say it each hour of every day. Say it to yourself until the words stand out like letters of fire across the sky.” ― George S. Clason, The Richest Man in Babylon.
A piece of advice in this classic book is simply to save one-tenth of every paycheck you receive, and then invest it wisely when it grows large enough. Some patience is required, but if you stick to your guns, it will work, and your way of living won’t be affected terribly.
If you’d like to start improving your tax strategy, contact D&M Accounting and we will be very happy to try to help reduce your tax burden!
To learn more about wealth building, consult the wise Ben Franklin whose words are still relevant today.