If you are worried about the government getting a large chunk of your estate and leaving less for your heirs, 2010 is the year to die. A weird quirk means that there is no estate tax this year. But next year, the estate tax returns with a vengeance: The exempt amount drops to $1 million from 2009’s $3.5 million, and the top estate tax rate increases to 55% from 45%.
Many people would rather find a way for their heirs to benefit, rather than letting Uncle Sam have the money. One way to do that is to gift money to your grandkids while you are still alive. This can be a great way to provide financial benefits to your heirs – without the need for your death. Plus, it reduces the size of your estate so that the taxes are smaller.
While you can just give your heirs money gifts, of course, here are 3 other ideas for gifting your heirs now:
1. Roth IRA
You can roll some of your money from a regular IRA into a Roth IRA (using special conversion rules for 2010) and name your grandchildren as beneficiaries. Remember that you still have to pay taxes on your conversion amount, though. But the good news for your heirs is that they won’t have to pay taxes on their distributions once you die and they begin taking required minimum distributions.
Another option is to encourage your grandkids to open their own IRAs. Then, you can help them fund their Roth IRAs. You can give up to $13,000 a year without paying taxes on it. This means that you can provide a gift to help your heirs fund Roth IRAs that grow tax free.
2. 529 Plan
Give your heirs the gift of college. Earnings are tax free, as long as your grandchildren use the money for qualified education expenses. Some states offer tax deductions on your contributions to 529 plans. You can even pay up to five years of your gift tax exclusion money at once, for a total of $65,000 (couples can pay up to $130,000). That’s a great start to a college education, and a significant reduction to your estate.
3. Trust
You can also set up a trust, if you have a large enough estate. You can set up individual trusts for your grandchildren, but that can get expensive. Others prefer to set up a “grantor” trust that puts it all in one trust with all the heirs named as beneficiaries. In this type of trust, you pay the taxes so the money grows tax free for your heirs.
First Things First
Before you get excited about giving all of your money away, though, it is important to make sure that you are taken care of. It is conceivable that you will live more than 30 years in “retirement.” You want to make sure that your financial needs are accounted for first. Make sure that you can cover expenses, and that you have a plan in place for your long term care if it should become necessary. Then, realistically consider what you can afford to give away right now. If everything is in order, and you are prepared for your own financial needs, you can consider setting up arrangements that can benefit your heirs now, and reduce their tax liability later.
This Guest Post was written by Nathan Richardson, the Marketing Manager of ComplexSearch.com, a blog covering the latest certificate of deposit rates and high yield money market rates.
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