Searching for a luxury home is part of a journey peppered with significant life events. Most homebuyers explore the market due to major life changes, such as marriage, retirement, the birth of a new child, or a job change. Just as these events can signify that it's time for a new home, they can also bring the idea of estate and legacy planning to your mind.
Your property is an important asset, but it's just one part of your financial assets. Creating a plan for managing all of those assets so they're efficiently tax-protected for your beneficiaries is more than just the next step in your life journey — it can be a significant weight off your mind. The expert real estate team with Carol Staab has compiled some of the most critical steps and tactics our friends and clients have used to organize their assets, create an estate plan, and preserve a legacy of financial security for their descendants.
1. Create a legally binding will
This tip may be the most obvious but also the most important. You need a legally binding will identifying your beneficiaries and your intentions for your property and assets. Without this foundational step, virtually all your other estate and legacy planning techniques will be shaky.
At its core, a will is a document that establishes what will happen to your estate after you pass away. When you own property or financial assets of any type, you have an estate by default. Your will determines what will happen to that estate as specifically as possible.
There are four basic levels of action when it comes to creating a will, each of which showcases the importance of taking this vital step:
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No will: Your estate will go through a messy probate process in which the state determines who receives your assets. Some norms exist, such as assets passing to a spouse or children, but it can be a costly and drawn-out process.
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A basic will: Many online or pre-packaged will solutions offer templatized options. These may or may not be legally binding and will likely be open to dispute. However, this document is better than nothing, as it tells your executor or beneficiaries your intentions.
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A legally binding will: This requires working with an estate attorney. They will craft a will that is binding and has much more legal heft. It will also be more comprehensive and detailed. Lawyers may offer additional estate planning, which we touch on in our next step.
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A frequently updated will: The will you first create should likely not be your final will. An excellent practice is to create or refine your existing will around every significant life event, such as the birth of a child, new grandchildren, or the acquisition of large assets. Updating your will makes it much less disputable and ensures it represents what you want as time progresses.
2. Create an estate plan
This is different from creating a will. Whereas a will states who should receive which portions of your financial assets, property, and other belongings, an estate plan is a broader strategy that organizes all of your assets so they're in the most advantageous structures and conditions for the efficient handling of your estate. This process will include:
- Identifying your executor, preferably a third-party professional rather than a relative
- Identifying who has power of attorney over your financial decisions if you become unable to make those decisions before your passing
- Choosing a healthcare power of attorney to make medical decisions on your behalf if you cannot
- Selecting guardians for minor children and dependents
- Naming beneficiaries for your assets
It also includes the financial and legal processes through which your assets will be held and managed before and during the transfer to your beneficiaries. For example, giving adult children significant amounts of cash before passing triggers a gift tax; bequeathing that cash upon your death makes it taxable through probate; giving it in a trust protects it from many or all taxes it would otherwise trigger.
Your estate plan should comprehensively outline processes your lawyer and financial advisor will implement to protect your legacy. Like your will, your estate plan may change as tax provisions or assets change or if you have more descendants.
3. Regularly review your account-level beneficiaries and your estate plan
The importance of this technique cannot be overstated. Your intentions will change over the years, as will the size and complexity of your estate. Different documents may even conflict with each other. For example, the 401(k) you may have had at your first job may have listed a sibling or parent as the beneficiary, and you may have rolled it into a traditional IRA with a different beneficiary. Your will may state that all financial assets will be split among different beneficiaries. While an updated will is likely to take precedence, a messy problem will water down your estate's value. Instead, complete these actions every year or after a major change:
- Review and update your will.
- Review and update your estate plan.
- Verify that the beneficiaries on different accounts align with your plan.
- Communicate changes to your beneficiaries to avoid miscommunication.
4. Create a tax-efficient course of action for bequeathing assets to your beneficiaries
One of the fundamental tenets of a great estate plan is that it minimizes that tax burden on the estate and your beneficiaries after your passing. Experienced estate attorneys can advise you on the right structures for your legacy plan, your holdings, and the state or federal laws that apply to them. While every plan is different, the following two key aspects are nearly universal:
Put the annual gift tax exemption to good use
As of 2022, individuals in New York can give annual gifts of
up to $16,000 without triggering a gift tax. That's $16,000 per giver per recipient. However, the lifetime gift tax exemption is $12.06 million (and likely to halve in upcoming years).
Create revocable and irrevocable trusts
Trusts are specialized accounts that can hold funds for a recipient. Your attorney can advise you on the pros and cons of revocable or irrevocable trusts (or a combination) to ensure your assets reach your beneficiaries properly.
5. Plan how you will pass down your home(s)
Property is just as much a part of your estate as financial holdings. However, they can be much more complicated, and handling them properly is essential for ensuring your beneficiaries don't face high financial burdens.
For example, passing down a house through a will may trigger similar provisions to a sale, requiring payment of the mortgage in full and the recipient to qualify for a new mortgage. Some popular options for creating a legacy plan that encompasses real estate include wills and revocable trusts.
A will is simple but potentially costly
This is a common option. However, the house will pass through probate as a taxable asset and may have downstream financial implications for the recipient.
Using a revocable trust can bypass probate
Trusts move assets to the recipients without going through the probate process. This strategy is efficient and keeps you in control. However, this needs to be set up by a legal professional, so planning is key.
Getting started
If you want to protect your family with a robust estate and legacy plan, that's an admirable goal. Proactively creating a detailed estate plan with the help of legal professionals will help you explore all possible options and create a plan that aligns with your wishes.
Trusted luxury real estate broker
Carol Staab is here to help you
find real estate holdings that can become part of your financial legacy. Reach out today to explore luxury homes in Midtown Manhattan and see how they can fit into your long-term financial plans.
*Header photo courtesy of Shutterstock
