The estate planning process is a complicated endeavor, but it’s an essential part of protecting your assets and loved ones after your passing. 

One way to think about the division and transfer of assets is to place them into two categories: easy money and hard money. But what do these terms mean, and how can you intentionally use them in your estate plan?

In this post, we’ll cover the difference between the two and how you can incorporate both into the estate planning process.

Understanding Easy vs. Hard Money

What’s the difference between easy assets and hard assets?

Easy Money

Easy money refers to items with little to no tax consequences when being transferred to loved ones after your passing.

Examples of easy money include:

• Real estate
• Checking or savings accounts
• Life insurance policies
• After-tax brokerage accounts

Hard Money

Hard money describes assets with potential tax consequences during the transfer from one individual to another.

Examples of hard money include: 

• IRAs
• 401(k)s
• Annuities

Estate Planning With Easy vs. Hard Assets

Once you understand what category your assets fall into, it’s important to determine how those categories actually function in your estate plan.

First, Determine Your Intent

Just as it sounds, start by determining what the intent for your assets is after your passing. Essentially, where do you want your money to go?

Do you want everything to go to your surviving spouse? Or should your estate be split equally among your children? Some people have more involved intentions for their estate, with plans to create scholarship funds, donate to charity, and more.

Understanding your ideal scenario for your assets after your passing is the first step in building an estate plan. Starting with intent allows us to work backward in determining how to make it happen.

Tax-Efficient Estate Planning

Taxes are perhaps one of the most significant threats to the transfer of your estate, and the good news is there are ways to establish a plan that minimizes these impacts. When considering your intent for your estate, keep in mind what types of assets are subject to tax and how that’ll impact who receives them.

For example, leaving assets to a spouse instead of a child tends to be more beneficial when handling “hard money” like retirement accounts. 

Why?

For one thing, the SECURE Act eliminated the “stretch” provision on inherited IRAs for most non-spouse beneficiaries. So while a spouse could stretch distributions over their lifetime, a child would have to take out all the funds within 10 years. That rule could create additional tax hurdles for your children. 

If you’re looking for a tax-free asset transfer for your children, consider making them a joint owner on a checking account. That way, when you pass, they can access the funds in that account right away without probate. 

A financial professional can help determine the potential tax consequences of your estate plan and work with you to create tax-efficient transfer strategies.

Easy Money and Hard Money, Where Do They Go?

Estate planning is rarely cut and dry, but the following tips tend to be a valuable place to start. 

• Easy money—real estate, life insurance policies, and checking accounts—tend to present good opportunities for joint ownership or naming a trust as a beneficiary. 
• Hard money—IRAs, 401ks, and annuities—is often best to leave to your surviving loved ones, aka direct beneficiaries.  

But who you leave your assets to and how you do it depends on the three core estate planning principles:

• Intent
• Maximizing efficiency
• Minimizing cost

For example, a trust isn’t appropriate for every person’s estate plan. In fact, for most of our clients who have trusts, the vehicle doesn’t own anything until the original creator passes away. The reason is it’s often best to name the trust as a beneficiary for easy assets. 

Managing the division between easy and hard assets as a part of your estate plan can be complicated. Working with a knowledgeable professional may be helpful in determining the best course of action.

Easy and Hard Money In Action: A Family Case Study

It’s not easy to visualize all the estate planning tools at your disposal. So let’s put these ideas in context with an example from a fictional family. 

Jim and Carol Carson are a retired couple in their mid-70s. They have three adult children: Stephanie, Kiera, and Todd. Their most significant assets are an IRA, savings and checking account, and their house. Here’s an example of what their estate plan might look like. 

We’ll start with intent. 

The Carsons would like to leave everything to the surviving spouse. After the spouse passes away, they want to divide their estate equally among their children.

The following is an example of a strategy the Carsons could use to maximize the efficiency of their estate and minimize the tax liability based on their intent. 

• Jim names his wife Carol as the primary beneficiary on his IRA. He also lists all three kids as contingent beneficiaries. 
• Jim and Carol jointly own their savings account, so they can both access the funds. They also list the trust as the beneficiary once they pass. 
• The Carsons decide they’ll have the oldest child listed as a joint owner for their checking account. That way, they could use it for unexpected medical costs, funeral expenses, etc., without waiting for probate.
• Since the Carsons live in Michigan, they establish a ladybird deed on their house. That way, Jim and Carol jointly own the home, and when both of them pass away, the house will go to the trust. 

As you can see, the Carsons used several estate planning tools to their advantage: joint ownership, direct beneficiary designations, a trust, etc. Did you notice the Carsons didn’t rely on a will? Learn more about why a will shouldn’t be your go-to estate planning document. 

There’s not one magic estate planning tool that will help you accomplish every one of your goals. But using various elements can help you keep your intention at the center of your estate plan. 

Estate Planning with Legacy Wealth

If it feels like estate planning is complicated, that’s because it is. You know you want to do right by your remaining loved ones, which means making a purposeful and tax-efficient plan.

The first step is to collaborate with professionals like us at Legacy Wealth Advisors. We’re here to create a holistic financial plan by working with you and with estate planning professionals to help ensure the peaceful transfer of assets to your heirs after your passing.

Get in touch with our team here to learn more.

Disclaimer: Advisory services are offered through Legacy Wealth Advisors, LLC dba Legacy Wealth Advisors, an Investment Advisor in the State of Michigan. 

Legacy Wealth Advisors does not offer tax planning or legal services but may provide references to tax services or legal providers. Legacy Wealth Advisors may also work with your attorney or independent tax or legal counsel. Please consult a qualified professional for assistance with these matters.

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