For starters, a good way to distribute your wealth is to leave it to your children in a trust. A trust, which can be structured in different ways, might specify exactly when assets pass to your beneficiaries (such as when they reach a certain age) and how the money should be used, such as only for expenses tied to education, health care or other necessities.
Trusts can also keep your estate out of probate court — which can be expensive and time consuming — and minimize estate taxes. Most estates aren't subject to federal estate tax, since the current exemption for individuals is $5.45 million, and $10.9 million for married couples, and a proposed tax plan that's pending in Congress would double that. Yet many states have much lower estate-tax thresholds.
Additional benefits of a trust: Heirs will still be able to access the money but it will be exempt from creditors. It will also be considered separate from the marital pool, which means if one of your children were to divorce, that money will not wind up in the hands of an ex-spouse.
If you own a 401(k) or IRA, you can also have the money transferred into an IRA trust. Similar to a regular trust, the assets are protected from bankruptcy, and withdrawals are managed by a trustee. And, that prevents an heir from treating an inherited IRA like a piggy bank upon the account owner's death.
You can save on the cost of creating a trust by incorporating it into your will. But it's important to note that the beneficiaries named on financial accounts — IRAs and retirement accounts, insurance policies and brokerage accounts — supersede what is dictated in your will. So make sure to stay up to date on whom you have designated as heirs.
Given all that, nearly three-quarters of all Americans said estate planning is confusing. Only 40 percent have a will and just 17 percent have a trust in place, according to the WealthCounsel's estate planning awareness survey, which means that many are not properly protecting themselves and their families.
So loop in a financial advisor, accountant and other professionals early on — they can help you run the numbers to figure out the best ways to safeguard your kids from fighting — or overspending — and limit the amount of taxes your heirs have to pay along the way.