3 Tips for Tax Issues in Estate Planning

Share Post: facebook Created with Sketch. twitter Created with Sketch. linkedin Created with Sketch. mail Created with Sketch. print Created with Sketch.

By Nick Gertsema, AIF ®

We’ve all heard the old adage about death and taxes and how they are unavoidable. We are aware our time on earth is limited and that, pending some miraculous medical breakthrough, we will all die. Ideally, that day is in the distant future, but that doesn’t mean that we don’t need to start preparing for what might happen to our estates when we pass.

When putting together financial plans, we often talk about our dreams, goals and legacies. We want to live life to the fullest. For some people, it is important to them that they set up the next generation to have more opportunities than they had. I’ve heard clients say that they want to leave money to their children, grandchildren, church, favorite charity and many other important causes and relationships.

I have never had a client tell me that they want to be sure to leave as much of their estate to taxes as possible. Talking about death is never easy, but here are a few tips on tax issues in estate planning that will help you make sure your biggest beneficiary is not the US Government.

Roth Conversions

The Tax Cuts and Jobs Act was passed and made some major changes to the standard deduction and tax brackets. We collaborated with many of our clients’ tax preparers and found that some clients have a unique opportunity for Roth conversions that could have substantial impact on the value of their estate and the amount of taxes their beneficiaries have to pay.

A traditional IRA allows deductible contributions to grow tax deferred until they are withdrawn from the account. A Roth IRA takes after-tax dollars, allows them to grow tax-deferred, and, if it meets all qualifications, the withdrawals will come out tax-free. Roth IRAs are also not subject to the required minimum distributions that traditional IRAs are subject to. They will also pass to your beneficiaries tax-free.

Roth conversion occurs when you take money from an IRA, tax it as income, and move it into a Roth IRA. Your assumption is you will be paying less in taxes now than you or your beneficiaries will pay when they take the money from the traditional IRA.

It is extremely important that your tax preparer is involved in this decision. Our tax preparers usually only know the information that we give them on an annual basis. They don’t have any idea your net worth or how much you have in qualified accounts. Typically, we pay a tax preparer to reduce our annual tax burden. In this situation, we would be increasing the current year’s tax liability to hopefully reduce future liabilities.

Harvest Tax Losses in After-Tax Accounts

An unfortunate truth of investing is that not every investment is a winner. Just because an investment is down for the year, doesn’t mean that it can’t still help your plan.

When you pass away, the investments in your non-qualified investment accounts transfer to your beneficiaries with a stepped-up cost basis. That means that when the investment transfers to your beneficiary, they receive the cost basis of the value of the investment on the date of your death.

Unfortunately, unused capital losses die with the decedent. If that investment has lost value, you can sell it to offset any capital gains in your account for that year. This means that effective end-of-year tax loss harvesting may help you offset any capital gains in your account and reduce your tax bill for the year.

Keep in mind if you have a stock that has appreciated in value by a substantial amount, it may make sense to never sell it. When you pass away, your beneficiary receives it with the cost basis of the date of your death. For example, if you bought an equity for $1 and it was worth $100 when you passed away, your beneficiary receives it with a cost basis of $100. If they sell it for $105, their capital gain is $5, not $104.

Gift Wealth While You’re Still Alive

Some clients are in a position that they are able to meet all of their spending goals comfortably and are now managing their beneficiaries’ inheritance. What could be better than knowing that you’re setting up the next generation for some financial success? The ability to watch them enjoy some of the inheritance.

In 2019, an individual can gift up to $15,000 to another person without being subject to the gift tax. A married couple can gift up to $30,000. But, beware, if you gift more than the allowed amount, the entire amount becomes taxable to the person giving the gift. Keep in mind that the current Federal Estate Tax Exemption is $11.4 million, but as recently as 2001 was only $675,000. That means that estates worth more than the exemption amount were subject to estate taxes on top of any other tax liabilities.

You’ve Worked Hard (For the Money!)

You’ve worked hard to get to where you are – it’s important that your hard-earned wealth goes where you want it to. These tips on tax issues in estate planning can be a big part of your plan, but you need to check with your financial advisor and tax preparer to see if they will work for you.

If you don’t have an updated financial plan, give us a call. We’d love to help!

Set up an appointment!


facebook Created with Sketch. twitter Created with Sketch. linkedin Created with Sketch. mail Created with Sketch. print Created with Sketch.
Share Post: facebook Created with Sketch. twitter Created with Sketch. linkedin Created with Sketch. mail Created with Sketch. print Created with Sketch.


The Stages of Retirement

By Mike Gertsema, Senior Wealth Advisor When we meet with most of our clients, we discuss retirement in different stages that we call the Go-Go Years, the Slow-Go Years, and the No-Go Years.

Marketing Slogans

By Mike Gertsema, Senior Wealth Advisor I see all the same marketing and advertising that you see from investment firms saying how they “offer something different” compared to other investment firms. Their slogans have been well-researched and sound great, but they’re missing a very importa …

4 Hurdles in Retirement Beyond Your Investment Portfolio

Becoming hyper-focused on only one aspect of a problem is pretty much never a good approach. A racecar driver who only focuses on speed and ignores strategy won’t win races, at least not many of them. A carpenter who only hammers in nails won’t build strong structures. 

Your Silicon Valley Bank Questions Answered

You likely have heard about the recent Silicon Valley Bank (SVB) collapse and probably have questions. Here, we provide you with unbiased answers to your questions.

1 2 3 115 116 117

Get in Touch

In just 15 minutes we can get to know your situation, then connect you with an advisor committed to helping you pursue true wealth.

Schedule a Consultation

TweetsFollow Us