3 Estate Planning Strategies the Rich Use to Retain Their Money
The wealthy hire the best lawyers, and they think about their estate well before their death. The goal, often, is to ensure that when they die, divorce or become incapacitated, their heirs will be able to keep their money in the family, instead of paying every last dime to the tax collector.
Estate planning for the average Joe is rather straightforward, and it’s not as expensive as many people assume.
The estate planning strategies that the rich invoke, or some of them at least, include:
1. Creating a Will
The first step in every estate plan is to create a will. This is the most basic form of estate planning, and a survey from 2014 showed that 64% of Americans didn’t have a will. Many of these individuals also assumed that they didn’t need a will.
If you have any assets you would like to leave to heirs, you have a reason to have a will.
What happens if you don’t have a will?
A will is a way for you to have a say in who gets what upon your demise. Those earrings that are a family heirloom that you wanted to give to your daughter may end up in the hands of someone else if you don’t include them in a will.
Probate court will follow, which happens to divide the assets.
In the end, probate court can be costly, resulting in your heirs being forced to part with assets or their own money to pay a costly attorney.
A few points to remember when creating a will are:
- Update the will on any major asset gains
- Update the will as your wishes change
- Update your will if the family structure changes
- Update your will if you’re getting a divorce
Continual updates are needed to keep a will relevant to your wishes.
The rich have wills, and so should you.
2. Create a Trust
A sizable estate may require the creation of a trust. A trust is a way to pay less in taxes, and if an irrevocable trust is created, all of the assets provided to the trust no longer belong to you. In effect, you’re giving up your assets before your death.
There are many types of trusts that can be considered, but irrevocable trusts are most common.
How does this work?
- A trustee is appointed to the trust to distribute your wealth
- Your assets are put into the trust
- The assets or money are not subject to estate tax
The trust will only have to pay taxes on assets that create an income. Dividend bearing stocks may provide a taxable income, as would interest on a savings account or other sources of income.
What’s even better with a trust is that you can put stipulations within the trust. For example,
- You name your son trustee of the estate
- You add a stipulation to the trust that no money can be used until after the trustee graduates college
Money from the trust can also be distributed while you’re alive. You can use your assets, yet shelter them from costly estate taxes at the same time.
3. Prenuptial Agreements
When you go into a marriage with assets and money, it only makes sense to have a prenuptial agreement drawn up. Brad Pitt and Angelina Jolie, the celebrity couple with an estimated combined net worth of over $400 million, can teach us a lot about prenuptial agreements.
The couple was dating for a period of 10 years before they got married, and even on this strong of a foundation, they still had a prenuptial agreement.
The couple was wealthy, individually before getting married, and it made sense for the couple to discuss their assets before they tied the knot.
What was at stake?
Besides the $117.5 million dollars the couple earned over their 2 years of marriage, a total of 12 properties would have been on the line, too.
The prenuptial agreement took care of all of these assets and the money the couple earned during their marriage. This is a smart form of estate planning that doesn’t have to be tied to your death.
What this does is:
- Protect your assets from a divorce
- Protect your family heirlooms
- Protect your money
An agreement must be drawn up according to your wishes, and it must be signed prior to the wedding. This agreement can mean the difference between a disgruntled ex-wife or ex-husband demanding a 50/50 split of assets, and taking your mother’s wedding ring out of spite and malice.
Prenuptial agreements can be a smart estate planning tool, and this is something you’ll want to discuss with your attorney in further detail.