Four Key Tax Issues that Impact Estate Planning

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Smart tax moves you can make now!

The April 15th tax deadline always brings taxation to the forefront, and along with it, many questions from our clients about how to structure their estate plan to minimize taxation for their heirs.

Four key issues that our clients are currently asking us about:

  • How can I help my children and/or grandchildren right now vs. waiting until I die?
  • The stock market is going down. Is there anything that I can do to take advantage of it, to lower estate taxes?
  • What can I do to reduce estate taxes on my IRA and pension plans?
  • We're thinking of moving to retire in another state. Are there any estate tax issues?

Gift Taxes

The gift tax is one of the most ignored taxes that can affect an estate. The 2022 federal gift tax annual exclusion amount (i.e., the amount that an individual can annually transfer to another individual without using any lifetime gift tax exclusion or paying any gift tax) is $16,000 ($32,000 for a married couple).

Many married couples don't realize that they can gift a lot more than $16,000 to their children who are married - they approach the gift as "we'll give $16,000 to each of our kids." Instead, the law allows a married couple to give a married child and his/her spouse up to $64,000 per year without having to report the gifts (i.e., each parent gives the child $16,000, so $32,000 total; and gifts the child's spouse $16,000 per parent, for another $32,000).

You may also not realize that the same can be done for each grandchild! For example, a married couple with four grandchildren may give these grandchildren up to $128,000 per year (i.e., $32,000 each). Note that all gifts are subtracted from the lifetime exclusion maximum.

Many seniors with sizable estates miss out on this strategy. Instead of gifting any excess from their annual income (which is a common situation with pension and investment income far above annual expenses), they save the excess amount, assuming it will be passed on to their heirs. There are some downsides to this approach, including your heirs may desperately need the gifts now, such as towards down payment on houses or paying off student debt; and a key premise in tax planning is to take full advantage of current tax shelters vs. assuming they will be there in the future. While we know that the current estate and gift tax exemption is $12.06 million, we don't know whether future legislation may lower it.

Roth IRA Conversions

If the current market volatility results in an overall downturn at year-end, there is a silver lining: A large market drop provides a good opportunity to convert even more of your retirement savings to a Roth IRA with an even lower tax bill. Because the value of your investments is lower during a decline in the market, you'll pay a smaller amount of taxes when you make the conversion. It's also a good strategy if your income is lower than it usually is in a given year.

RMD Implications for Estate Taxes

One approach to reducing inheritance taxes for your heirs is to withdraw more than the required minimum distributions (RMDs) from your IRA. Consider this -- how does your current tax rate compare with the tax rates of your IRA beneficiaries? If you have a large IRA and your children have high incomes, your heirs could be forced into a much higher tax bracket when they inherit your IRA. Some key considerations for deciding whether you should take more than RMDs include your tax bracket, income, and Medicare premiums.

State Estate Taxes

For those who are looking to relocate out of state, keep in mind that while current California law does not have an estate tax, at least 13 states levy such taxes, often with surprisingly low thresholds (e.g., Oregon at only $1,000,000).

Seek Expert Advice on Tax Issues in Estate Planning

While this article is intended to shed some light on taxation and estate planning, it should be noted that this topic is complex and requires detailed analysis and planning. At Mortensen & Reinheimer, PC we work closely with our clients and their CPA to develop a complete plan. Please contact us at (714) 384-6053 to make an appointment, or use our online contact form. Our website is http://www.ocestateplanning.net.

About the author:

Tamsen R. Reinheimer
Tamsen R. Reinheimer, Attorney, is a Certified Specialist in Estate Planning, Trust & Probate Law (The State Bar of California Board of Legal Specialization). She has significant experience in all aspects of estate planning, trust administration, and probate. Contact Tamsen at tamsen@ocestateplanning.net.

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