Tax Tips for Leaving Your Legacy in a Will

Advice on how to avoid the most common mistakes made when creating a will.

by Leann Reynolds • Member { View Profile }

When it comes time to draft a will and leave a legacy for loved ones, there are some important tax changes and rules to know about.

Two experts offer their best tax tips for creating the best possible legacy. Dominique Molina is the co-founder of the American Institute of Certified Tax Coaches ( and Ann-Margaret Carrozza is an attorney who specializes in estate planning, wills, trusts, and many other cases (

What are some tips for someone to leave a legacy to their family in their will?

DM: “Don’t stop at just a will! Make sure you seek advice from a proactive tax planner who can advise you on the tax benefits of setting up a trust. 

If someone is looking to leave a charitable legacy and receive tax benefits during their lifetime for their gifts, yet still wish to provide income throughout retirement, they might consider a charitable remainder trust.

Charitable trusts let you sell appreciated assets such as stocks, real estate, or a business, avoid the tax you would otherwise pay on the gain, and take valuable charitable deductions.   Charitable trusts let you avoid tax when you sell appreciated assets such as real estate, a business, or securities. This requires splitting the asset into two parts (an income, payable for a term of up to 20 years or a lifetime, and a remainder, payable when the income ends), and giving one to charity.”

AC: “If you are considering gift planning in order to reduce the estate, you would be well advised to gift into a trust rather than directly to your children.  Unlike a direct gift, the trust will protect the assets from your children's possible liabilities (divorce, car accident etc.).  Upon your death, the assets in the trust pass automatically to the children thus avoiding the time and expense of probate.”

What are the most common mistakes people make when creating a legacy or will?

DM: “The biggest mistake is the failure to plan for estate taxes.  Federal income tax rates top out at 35% for taxable incomes over $379,150.  But estate tax rates START at 35% for estates over $5.0 million.  Good estate planning can minimize or eliminate this most devastating tax.  Proactive planning is KEY if you want to minimize the effects of this burden.

Another common mistake concerns how people handle their retirement plans.  Most taxpayers will simply designate a beneficiary on their retirement plans.  While this will allow accounts to pass automatically to your designated beneficiaries, and bypass probate, it may create less flexibility and more tax for the heirs.  Instead, you can designate a living trust as beneficiary of your IRA without forcing the trustee to distribute assets and trigger taxes.  This gives the heirs the ability to distribute the funds when they want (preferably in accordance with their tax plan to reduce the overall amount of tax they will pay on the distribution).”

AC: “The most common tax mistake I see has to do with life insurance ownership.  You should not be the named owner of your policy or the entire death benefit will be taxed as part of your estate!  Yes, I know that the salesperson said that life insurance is tax free.  This is partially true.  Life insurance is income tax free. In other words, you will not have to pay income tax each year on the internal growth of the policy value as you would have to on a mutual fund or most other investments. However, the value of the death benefit is includible in the owner's taxable estate.  This is why your life insurance policy should be owned by a properly created Life Insurance Trust. If the trust is the owner, then the entire death benefit will escape taxation of every type!”

Have there been any tax changes recently that might influence how people should put together their wills?

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