Tag Archives: wills

Should your estate plan try to avoid income taxes rather than avoid estate taxes?

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With the federal gift and estate tax exemption nearing $13 million, a married couple can have close to $26 million in their estates before any federal estate tax would be due.  That leaves only a small percentage of people in the US who actually need estate plans focused on avoiding estate taxes.  Those who are comfortably below the threshold can instead focus their plans on reducing income taxes.

Estates get a step up in basis at death, so that assets do not pay both estate and income taxes.  For example, the house owned by a couple often has a low basis, so taxes will be due on sale.  When they die, they get a step up in basis, eliminating that gain and the corresponding income tax that would be due at death. 

To illustrate, here’s an example:  a married couple own a house worth $2 million for which they paid $500,000, they have $2 million in retirement accounts and $5 million in broker accounts.  Their combined estate of $9 million is well below the federal exemption of nearly $13 million per person, so no federal estate taxes will be due.  They have $1.5 million of gain if they sell the house, of which $1 million would be taxed after applying the $500,000 exclusion on the sale of a principal residence. 

If they have the standard estate plan, they will have revocable trusts that use the state and federal estate tax credits at both the first and second deaths.  If proper elections are made, no estate taxes will be due at the first death and no federal estate taxes at the second death.  They will also get the step up in basis. 

But what if one spouse dies many years later?  The half with the step up at the earlier death could now be subject to taxes on gain when the heirs direct the estate or trusts to sell.  If the house is then worth $4 million, the half in the trust of the first to die has new gain of $1 million on which income taxes will be due. 

If instead of having half the house counted at the first death, what if it is treated as passing to the survivor?  Then there is a full step up at the second death, with no gain.  And they have not traded capital gains for estate taxes.  While assets are counted in the second estate, rather than using the exemption at the first death, the first estate can make proper use of the deceased spouse’s unused exemption or “DSUE.”  Since 2012, federal law allows any portion of the gift and estate tax credit not used in the first estate tax filing to be carried to the second spouse’s death or “ported,” if the proper election is made.  This “portability election” for the DSUE is made on the estate tax return. 

But what happens when the federal credit drops back down in 2026 to the old amount as scheduled, which, after adjusting for inflation, is expected to be around $7 million?  The estates for the couple in our example still avoid federal estate taxes, using the DSUE of up to $7 million from the first death and the $7 million credit at the second death.  

Planning for state estate taxes may be necessary (for Massachusetts residents, the trusts can be used to shelter $1 million, the maximum credit).  And you may want to use trusts to control who gets access to the estates and when.  Also, you may need to plan for the generation skipping transfer tax or “GST” tax, which requires use of trusts and proper elections at death. 

If your net worth is enough to need estate planning but you do not expect to owe federal estate taxes, then your plan can address avoiding capital gains and use the DSUE to ensure that estate taxes are still avoided.  

  • Note that Massachusetts increased the estate the exemption from $1 million to $2 million as of January 1, 2023.  This may affect your planning. 

Let me know if you would like to discuss this.

Steven

Estate planning checkup: why you don’t, why you should

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Why you don’t:

We have written previously stressing the need to have an estate plan, so you do not leave a mess, and why you may need life insurance to protect others.  Few people will disagree with the need to have a current plan and to provide for survivors, but not everyone acts.  

So, why is it that people fail to take action?  Rick Kahler wrote recently about Overcoming Client Procrastination with Financial Planning.  In his post, he lists factors that cause people to put off action that agree is important to address: 

  1. Avoidance.  Feelings of self-doubt, fear of pain or anxiety around the task, depression, fear of asking for help, lack of trust.
  2. Perfectionism.  Fear of failure, fear of being criticized (both externally by others and – often more powerfully – internally by parts of yourself).
  3. Ambiguity.  Lack of clarity about the task, feeling overwhelmed, difficulty prioritizing in the absence of a crises, being focused on immediate tasks.
  4. Narcissism.  Over-confidence in getting it done at the last minute. Needing chaos or pressure to provide adrenaline, the ability to focus to the exclusion of everything else, and a feeling of being fully alive.
  5. Physical Issues.  Fatigue, illness.
  6. Lack of knowledge.  Not knowing what you don’t know, unsure how to get needed help and information.
  7. Financial.  Not having the funds to take the necessary action.   

Do any of these apply to you?  If so, we can help so please contact us. 

Why you should:

One reason to review your estate plan is that the Biden administration may seek changes to the estate and income tax laws; you want to make sure your documents have the flexibility to address these changes.  The current federal gift and estate tax credit is close to $12 million.  However, it is scheduled to drop to between $5.5 and $6 million in 2025 and the administration may push for a lower credit to be imposed sooner.  Also, the administration may try to eliminate the step-up in basis at death.  We will continue to monitor any proposed law changes and post updates. 

There are other tax law changes to address, such as the elimination of the “stretch IRA.”  You may need to revise your beneficiaries.  Also, you will want your executor or personal representative to elect portability of your federal credit to minimize taxes and may want your documents to address the generation skipping transfer tax credit.

Another reason to act is to provide for your digital assets, something old documents may not address.  For example, you can give your attorney-in-fact under your durable power of attorney access to your digital assets and you can assign your digital assets to your revocable trust so your trustee has access.  Digital assets include e-mail and text messages, photographs, videos and other files on your computer, on-line accounts such as your investments and social media, or even intellectual property and patent rights.  You may also have collectibles that need to be addressed,

Another reason to act is to ensure that someone knows how to access all your passwords if something happens to you.  Create your own “Rosetta Stone,” a document telling them how to access your digital life, with IDs and passwords, and then make sure an immediate family member or close friend knows where to find it.  This way, they can locate all your important documents, find assets and insurance, and handle your social media if something happens.  You may also want to provide a memorandum to your personal representatives and trustees detailing your wishes, including thoughts on when to distribute to children, protecting from creditors, and even burial or cremation.

If you to take the time now to review and update your plan, be sure:

  • that you have documents that are in order,
  • that the documents are correctly executed,
  • that you provided adequate resources for survivors, including life insurance, and
  • that your beneficiary designations and asset ownership all coordinate with your documents.

When you do, you will have improved matters for you and your family! 

Contact our office if you have any questions or comments. And be well!

Will you leave a mess or a legacy? Don’t die without a plan

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“where did they leave it?”

Estate planning is not fun.  You have to face what the world will be like after you leave it.  You want to leave a legacy so your survivors are happy.  However, less than one in five of you have taken the steps needed. 

If you completely ignore creating a post-death plan, then you will leave a chaos and confusion for others to sort out at a time when they will be grieving from your loss.  They will have to find where you put everything and sort out where you wanted everything to go. 

If people depend on you financially, not providing enough on which they can survive will mean major lifestyle changes for them.  Not something you want. 

You want survivors to focus on cherished memories, not on probate courts.  Take action! 

Now, what do you do?

First, leave enough so survivors can survive

Make sure you have provided for those who depend on you.  Usually, that means purchasing some form of life insurance.  You want to replace your earning power from now until the time that they are independent, either when a spouse or partner retires or when your children become gainfully employed. 

If you have been saving for retirement, those accounts may be enough so you don’t need to purchase life insurance.  Reviewing your potential estate with an advisor is wise to make sure survivors have enough. 

Second, sign the documents

Execute documents that ensure that your estate goes to the people who you want to benefit.  This usually means signing beneficiary designations for retirement plan accounts and executing a will.  You may even need a trust for young survivors.  We wrote this post detailing the steps a few years back.  If that’s too technical, ask me questions. 

You may want to consult an advisor to get all the proper documents in place.  Here is a good checklist to review.

Third, have the conversations

Talk to your spouse, to your adult children and to the people you name in your documents.  Make sure they understand your wishes.  Do you want to be buried or do you want to be cremated?  Do you want donations made to charities? 

What if you have a catastrophe the doesn’t kill you, but leaves you hooked up to machines forever?  Have a conversation so your loved ones know your wishes.  And, make sure you sign a health care proxy or medical directive, living will and even a “do not resuscitate” or DNR order. 

Fourth, leave a trail

Make sure the key people know how to find everything.  One way is to write a memorandum listing your passwords, where to find the safe deposit box key, and where you stored the life insurance policies.  Give copes to key people, such as the personal representative named in you will or the trustee of your trust. 

Finally, leave a legacy

When you take care of all you can, in advance, your survivors don’t have to suppress feelings while they clean up a mess:

“WE WERE WORRIED ABOUT MY MOM after my dad died, but he had everything in order. It allowed us to focus on our grief instead of being bogged down in financial paperwork and family bickering.” That’s one of the candid responses Merrill Lynch and Age Wave received when they interviewed more than 3,000 Americans 55 and older for a comprehensive look at attitudes and practices surrounding legacy planning.  From How do you want to be remembered…

planning and taking action

You will need to review and update your plan over time.  But, just knowing you took all these steps should improve matters for you and your family now!  Contact our office if you have questions so you can “don’t worry, be happy!”