Tax Planning Strategies
Consider the impact of a 50% estate tax on your family’s inheritance
There have been significant changes in estate and gift tax laws. The amount you can pass without incurring federal tax to your children and grandchildren will be $5 million, indexed annually for inflation. The amount for 2017 is set at $5.49 million. In Massachusetts estates above $1,000,000 remain subject to the Massachusetts estate tax. Married couples with the right type of trust and funding may double the tax free amount to $2 million. This is not automatic so its important to make sure you create and maintain the proper estate plan.
When you look at your projected estate tax amounts with even modest growth, the federal and state estate tax can be quite significant with a combined rate of 50%. While growth in the value of your assets is good, it creates a big tax problem. Caution: Massachusetts continues to tax all estates above $1 million. If you start now, however, you have time to take steps to avoid this significant tax problem from eroding your family’s inheritance.
DO YOU HAVE AN ESTATE TAX PROBLEM?
Consider also that you may already have an estate tax problem.The combination of the MA applicable exclusion (the tax free amount), only $1 million in 2017, and an increase in value of your investments and other assets can create a major tax problem. It is important to be aware of this and begin implementing a plan to increase the gift and estate tax free amounts for your family members.
PLANNING TO REDUCE TAXES WITH GIFTING
Most people do not wish to pay any more in taxes than absolutely necessary. Given a choice, they would prefer to provide for their children, grandchildren, or even causes that are important to them. Saving taxes and benefiting your family is a matter of acting on the choices you have.For those with a large estate, there is a window between now and the end of the year to gift up to $5.49 million, free from any gift or estate tax.
Gifting programs to children and grandchildren can allow you to reduce a taxable estate by $14,000 per year, per child or grandchild, $28,000 each for a married couple, which provides $280,000 tax free over a ten year period. If you have three children and they each had two children, that’s over $3 million dollars that can provide a substantial estate tax savings.
EDUCATION FUNDING FOR GIFT AND INCOME TAX SAVINGS
Parents or grandparents can also use gifting to fund the college education of their children or grandchildren. With a tax advantaged 529 Plan you have the opportunity to pre-fund an education with $70,000 in the first year, five years worth of gifts, without losing control of the money if your child or grandchild chooses not to pursue higher education. A grandparent can fund a 529 Plan without compromising their grandchild’s eligibility for grants and scholarships. 529 Plans have the added benefit of income and capital gains tax free growth as long as the funds are used for qualified tuition expenses. The sooner you start, the greater the savings.
Gifting should be done annually as the opportunity is lost as each year goes by. Therefore it is critical to evaluate your situation now to see if there is a potential tax problem and if so, take steps to reduce or eliminate it as soon as possible.
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Tax Planning with Retirement Accounts
The economic principles that make deferring distributions from a qualified plan or IRA advantageous during the participant’s lifetime apply equally well after the participant’s death. In planning for the distribution of qualified plans and IRAs after death, structuring the beneficiary designation and distribution options to maximize income tax deferral should be a primary objective. The difficulty is how to achieve estate tax minimization and deferral at the same time. One planning strategy that you may consider is a “stretch.”
“Stretch” Distributions and IRAs
The “stretch” is not a financial product, but a planning strategy that allows for the deferral of tax on the assets accumulated in the qualified plan or IRA. This is done by allowing the required minimum distributions to be stretched out over the owner’s lifetime and possibly the beneficiaries’ lifetimes, before all the assets are required to be distributed. Thus, a “Stretch” Distribution or a Stretch IRA is simply a qualified plan or IRA that is eligible to be distributed over a long period of time after death. For income tax deferral purposes, you want post-death distributions from a qualified plan or IRA to qualify for a Stretch Distribution or as a Stretch IRA. This is accomplished by making sure that the plan or account is payable at the participant’s death to a Designated Beneficiary.
Family Limited Partnerships
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