“Tax,” “Plan” and “Strategy” are three very powerful words. No one wants to pay more tax than they should. Planning to avoid excessive taxes takes sound advice, and that advice usually results in putting together a strategy. An estate tax-planning strategy is even more important, because estate taxes may not affect you or your family until many years into the future.
Initial Strategy Questions
The first question many people ask is “Why do I need an estate tax plan?”
Let’s answer it by asking four more questions – just to make the point. Are you or, at some point in the future, could you be:
A homeowner or an owner of another piece of real estate?
A business owner?
Married or living in a long-term relationship
A parent or grandparent?
Question #5: How will future tax legislation affect you, your income, your wealth or your family?
If you answered “Yes”, “Probably” or “I hope so” to any of the first four questions, and “I don’t know” to the last question, then you may well benefit from having your own estate tax plan. Estate plans are for everyone who has a home, a retirement account, a family, a decent income and, say, life insurance. They are not just for the top 1 or 2%.
There are a lot of things to take into account when it comes to estate tax planning strategies. The primary purpose of having an estate plan is so you can, and will be able to, leave as much of what you own to the people or institutions who matter to you. If you do not plan ahead well enough, you will leave many decisions about what you own to a probate judge who will be governed by state and federal law, not by what you wanted to happen.
Your Main Goal
Most people’s main goal is to make their own decisions about their own home, business, wealth, savings and other retirement accounts. This goal may involve:
Your spouse and children from your present marriage.
Your spouse and children from a previous marriage.
Deciding who gets what, how much they get, when they get it and what they may do with it.
Charities or other institutions in which you are involved.
Making sure your beneficiaries pay as little tax as possible, so they inherit as much as possible.
When you consider that your goal may not become a consideration for decades to come, having a plan today that will achieve your future goal makes a lot of sense. Let’s now consider some of the specifics of an estate tax plan strategy.
Six Estate Tax Plan Strategy Specifics
1. The first thing to do is draw up a Will. Without a Will, a judge makes all of your decisions. Those decisions may be affected by your family’s attorney, of course. The attorney’s fee will be paid by your estate.
2. Not all of what you own is covered by a Will. Some retirement accounts and life insurance policies may be outside probate rules, so if you want a particular person to benefit from these sources of wealth, then you must name them as beneficiaries. As part of your plan you should also name secondary, or drop-down, beneficiaries.
3. Every time you have a major life event, it will pay you to revisit your plan. A marriage, a divorce, a birth or a death may change who you want to benefit.
4. Inheritance taxes may be reduced, or avoided altogether, by setting up one or more Trusts. Irrevocable or Permanent Trusts can give you the best tax-efficient results. If you put savings or retirement funds – or your primary residence – into a trust, the trust owns them. and it owns them from the day you put them into it.
The Trust does not “pass away” as a human does, so there are no estate taxes to pay on whatever the Trust owns. You decide who the trustee will be, and you can stipulate how they must manage the Trust and its assets. You can even arrange for these things while you are still on this earth.
Trusts do pay income tax or capital gains taxes, so by having the Trust pay expenses, the net tax may be lower than it would be otherwise.
There are different types of Trust, and each meets specific needs depending on the asset, the value, the time frame and the potential beneficiaries.
5. Part of your strategy may include converting your traditional IRAs into Roth IRAs. Unless a spouse inherits, a traditional IRA or 401k will be subject to tax. When future legislation will require that tax to be paid is unknown, so you can plan ahead to minimize the future impact.
6. State and Federal tax laws vary. They do not work in tandem, and no one knows how future legislatures may change them. By having a workable strategy in place, you can adjust accordingly. It may be sensible to give, sell or transfer some of your wealth to your future beneficiaries on a year-by-year basis so your tax liability, and their tax liability in minimized on an “as you go basis.”
Planning ahead saves money and avoids regret. Each person’s situation is different, so the right plan will take analysis, understanding and experience. You want the right professional advice, and you want advice that will protect you, your wealth and everyone who matters to you in both the short term and for decades to come. The best way to take that first step is simply to click this link to contact us. We will answer your questions, and help direct you, so your strategy works the way you want it to.