If you are not familiar with how federal estate taxes work, the government will tax your estate if it exceeds a certain amount. The problem is not only the potential tax, but that the laws are ever-changing. If you remember, years ago, the magic number was $600,000. Every dollar over the highest exemption amount was taxed at a rate as high as 55 percent. As time has gone on, that magic number has changed. The $600,000 number went up to $750,000 and then to $1 million, then to $2 million, then to $3.5 million and eventually to $5 million. The question is, where will it go in the future and how should you plan for it?
As humans, we all struggle with procrastination as we deal with everyday life, knowing in the back of our minds that we should eventually get around to planning for the future. None of us relish the thought of planning for our deaths. The problem is that our procrastination could end up biting our family members in the form of taxes if we do not happen to die in the right year. If you recall, George Steinbrenner, the famous and controversial owner of the New York Yankees, happened to die at the right time to take advantage of the tax laws. His family saved more than $500 million dollars because he happened to die in 2010 when the tax laws were favorable.
As the tax laws stand at the present time (anything more than $5,120,000, which has been adjusted for inflation from $5 million), you might think you don’t have anything to worry about if your estate is not close to that number. However, if nothing changes before the end of the year, the tax credit will revert back to the old number of $1 million. Add up everything you own in your head. This $1 million dollar number has the potential to affect a lot of people that would never think of considering themselves wealthy. When you add up the value of your home, retirement accounts, savings, investments, your toys and everything else, that magic number may not be hard to reach.
What do you do? The answer: create a plan that will take maximum advantage of the rules, no matter what they are. The Retirement Guys call this process “Detaxification Legacy Maximization.” Detaxify! Like detoxing your body from poison, detaxify your estate from these dreaded taxes as much as possible. My spell checker is telling me that “detaxificaton” is spelled incorrectly. That is because it is not a word. We made it up. The key is overcoming the procrastination and making that dreaded trip to the attorney’s office to talk about your planning options.
Here are some things to consider:
1. Create a plan that takes advantage of the maximum federal estate tax credit. A trust can be created that includes language, which will deal with this situation if needed. You can create what would be like a “toggle switch” that can be flipped if needed. This is the “detaxification” part.
2. Consider the potential cost of probate. Probate is not necessarily bad, but if you have a lot of assets that will be probated, the cost of the estate administration may be unnecessarily high. A living trust might be the way to go to deal with this issue. This is the “legacy maximization” part.
3. Don’t forget about income taxes. Please note: income taxes, not estate taxes. Your retirement account, such as an IRA, 401k, 403b, etc., may be one of the biggest assets you own. Remember, if it is a traditional retirement account, the dollars remaining in the account have never been taxed. This is an issue that many estate planners never address. The IRS now allows what is called a multigenerational stretch-out of income taxes by heirs who inherit retirement accounts. A special separate retirement account trust may something to consider. This is another way to create “legacy maximization.”
There are many other issues to consider when creating your plan. Don’t count on being lucky in death like George Steinbrenner. Avoid human nature and stop procrastinating. Detaxify and maximize before it is too late. As always, The Retirement Guys wish you a happy and relaxing retirement.
For more information about The Retirement Guys, tune in every Saturday at 1 p.m. on 1370 WSPD or visit www.retirementguysnetwork.com. Securities and Investment Advisory Services are offered through NEXT Financial Group Inc., Member FINRA / SIPC. NEXT Financial Group, Inc. does not provide tax or legal advice. The Retirement Guys are not an affiliate of NEXT Financial Group. The office is at 1700 Woodlands Drive, Suite 100, Maumee, OH 43537. (419) 842-0550.