This article from Kiplinger by Janet Kidd Stewart, published May 9, 2024, is chock full of good tips. It’s a lot to digest, so I’ll split it into two parts. Here are seven of the thirteen Ms. Stewart recommends.
Next week, I’ll post the remaining seven tips. However, as the last line of tip #6 says, it’s important to consult an experienced attorney about these ideas. I’d be happy to help you decide which of the 13 tips might make sense for your estate plan. Call me at 513-399-7526 or schedule a consultation through my website at www.davidlefton.com
“Follow this estate planning checklist for you (and your heirs) to hold on to more of your hard-earned money.
Several years ago, Kelley Brooks’s husband, Chris, who was being treated for hypertension, died in his sleep. Like so many other couples in their 40s, they had talked about estate planning but never got around to it. “You think you have forever to do all that, but you don’t,” says Brooks of Bellingham, Mass.
Experts hear similar stories all the time. “People often underestimate how much it will cost if they don’t plan,” says Renee Fry, founder of Gentreo. For people nearly or newly retired, who potentially still have decades ahead for their assets to compound and grow, estate taxes are a huge concern.
The generous estate tax exemption, now a whopping $13.61 million (up from $12.92 million last year), will soon be on the chopping block. The exemption is set to expire at the end of 2025, which would drop the base estate exemption amount down to $5 million (adjusted for inflation) in 2026. However, the large exemption has lulled many people into thinking they shouldn’t worry about estate taxes or other threats to their money. Still, they should, says attorney Martin Shenkman, a veteran estate and tax-planning attorney in the New York area.
“Anybody with wealth needs to plan,” says Shenkman, citing looming deficits that could hasten a change in the exemption amount. Estates with values exceeding the exemption amount by more than $1 million are taxed at $40%, and some states also levy an estate tax. He says if the gift exemption is cut substantially, it will shut down many ways people reduce their taxable estates.
Asset protection strategies that benefit you during your lifetime can also double as estate tax moves that preserve wealth for your heirs, he says. “I’ve been jumping up and down about this because, in difficult economic times, you tend to see more litigation,” says Shenkman, who uses several types of trusts to move money out of clients’ taxable estates. “When people are hurting, they look at every option to get money.”
So, how can you save as much as possible on fees and taxes and preserve the most for the people you leave behind? Consider these 13 estate-planning moves, which may be as simple as designating a different IRA beneficiary or as complex as setting up a trust.
1. Rethink IRA investing strategies
Passage of the SECURE Act in 2019 upended estate plans by forcing most non-spouse beneficiaries of traditional IRAs into a 10-year window for distributing assets. Before the law took effect this year, those beneficiaries could “stretch” the distribution of an inherited IRA over their own lifetime. Now, some families must rethink how they leave assets, particularly to children and grandchildren. (Minor children have until they reach the age of majority before the 10-year clock for distributing assets starts ticking.)
Beneficiaries such as siblings or partners who are not more than 10 years younger than the account owner can still spread the distribution based on their life expectancy. People with disabilities also are exempt from the new rule. That could argue in favor of leaving a traditional IRA to them and other assets to children, the reverse of previous advice.
“Previously, people wanted to leave money to a grandchild and spread those [distributions] over 60 or more years. Now the window is different,” says Eric Bronnenkant, head of tax for Betterment.
2. Sneak in a Roth conversion
3. Leverage the annual gift tax exclusion
Every year, anyone can give anyone else, or multiple people, a gift up to the annual gift tax exclusion amount — $18,000 in 2024. Couples can each give someone up to that limit, for a combined total of $36,000, without incurring gift tax. Go over this amount, and you’re required to file a gift tax return, with any amount in excess applying toward your lifetime exclusion.
Usually, the annual gift tax exclusion is the first thing we talk about “because it has no impact on the estate tax exemption, so you’re basically saving 40% on those gifts” if you’re going to be subject to the estate tax, says Bronnenkant, referring to the top marginal estate tax rate. “Leveraging the annual exclusion every year is fantastic.”
Even better, he says, is the 529 college savings plan kicker, which allows a gift giver to superfund five years of gifting into one. This means you can contribute up to $90,000 at once to a plan, effectively spreading the exclusion over five years. If you’re married, the limit per couple is $180,000 per beneficiary. On the downside, you can’t spread the deduction over multiple years on your state taxes, or make additional gifts to the same person during the five years. And if you die during the five years while you’re spreading the exclusion, only a prorated amount applies to your estate. But Bronnenkant still thinks it’s a great deal for many people.
4. Use up your lifetime gift exemption early
If you think gift and estate tax limits are heading lower, Bronnenkant suggests using up your lifetime gift exclusion now.
“If you have an asset you think will appreciate and want to leverage today’s exclusion because you’re concerned it’s going lower, the IRS has given guidance that indicates you won’t be penalized for using up your exemption while you’re alive,” he says.
If you hold onto an appreciated asset and die when the exemption is lower, your estate tax will be higher because more of the estate will be taxable. So what happens if you use up the exclusion and Congress doesn’t lower the lifetime exemption amount? You’ll still benefit because there is less in the estate that can be taxed when you die. There’s a tradeoff, however: The cost basis of gifted assets carries over to the person receiving the gift.
“If you were going to end up being below the estate tax exemption in either scenario, you may be better off holding onto the asset until death so [your heirs] can benefit from the step-up in basis,” he says. Plus, you’ll have more security in case you need the money. “I would prioritize economic security currently over a potential tax benefit in the future that is uncertain.”
Another gifting strategy that doesn’t sacrifice economic security: Giving appreciated assets, such as stocks, to an ill spouse who is expected to die sooner than you will. Have your spouse name you as a beneficiary, putting you in line for a stepped-up basis at your spouse’s death.
“The IRS is hip to this strategy, and they’ve said the person who receives it must have it for at least a year,” he notes. And remember, the “ill” spouse could outlive the other.
5. Pay medical or education expenses directly
Another way to save on future estate taxes is to write checks for someone else’s medical expenses or education. Paying medical bills or tuition — for preschool through graduate school — doesn’t count toward the annual exclusion or the estate tax exemption, provided the checks are written directly to the health care provider or school, Bronnenkant notes.
“You can keep writing checks all day long and it reduces the taxable estate while making someone else very happy they don’t have to pay,” he says.
What if we give away too much? “It’s a fair question,” Bronnenkant says. He stated that “a lot of people are re-evaluating their charitable contributions and their gifting to grandchildren to see if those are sustainable, and people are at least considering cutting back temporarily.”
6. Build an irrevocable trust for your spouse
Many have a similar unease with irrevocable trusts because, by definition, they mean largely giving up control of assets. But creating one now could help you take advantage of today’s high exemption, Shenkman says.
“If you move some money into a trust today, you can still benefit from [the exemption.] Spouse 1 puts money into a trust for Spouse 2 and all descendants,” he says. “You still as a couple can access the money.” Staying under the exemption amount gets money out of an estate now without gift tax, and you can still have some access to the funds through a spouse with the rest going to other heirs.
The trusts he’s talking about are called spousal lifetime access trusts. SLATs are irrevocable trusts with a spouse as beneficiary and perhaps children or grandchildren as remainder beneficiaries. While you’re still alive, your spouse can tap the trust for health, education and general living expenses, which indirectly benefits you. Meanwhile, your spouse can set up a SLAT naming you as beneficiary, but the trusts cannot be identical, or the IRS may come knocking.
Shenkman frequently creates SLATs for clients and has even established them for himself and his wife. “We’re both [each other’s] beneficiaries, and it has been untouched for over eight years,” he says, though if they end up needing the money down the road in retirement, it’s there. Generally, longevity helps prove the trusts weren’t thrown together quickly to hide assets from creditors.
Shenkman recommends hiring an independent trustee to oversee distributions to avoid a legal challenge to the trust. And there are other caveats, including a cautionary note about dumping a big portion of your retirement wealth into them.
SLATs can be useful, but don’t go overboard. A couple shouldn’t stuff a SLAT so full of funds that they can’t maintain their lifestyle, according to PNC Insights, a wealth management publication. That’s because, at their core, SLATs are irrevocable. Thinking you could be heading for a gray divorce? Steer clear.
As with other more complex trust strategies discussed here, it’s important to consult an experienced attorney about these ideas.”
Next week, I’ll post the remaining seven tips. However, as the last line of tip #6 says, it’s important to consult an experienced attorney about these ideas. I’d be happy to help you decide which of the 13 tips might make sense for your estate plan. Call me at 513-399-7526 or schedule a consultation through my website at www.davidlefton.com
Source: Kiplinger May 9, 2024. Written by Janet Kidd Stewart