Klitzman Law Group, PLLC

Estate Planning has Begun for Exemptions Expirations

The high lifetime estate and gift tax exemptions gave extremely wealthy Americans terrific tax breaks. In 2024, exemptions are currently at $13.61 million per person and $27.22 million for married couples.  However, the end of these levels means that taxpayers with wealth of a much lower magnitude will need to prepare, according to a recent article from Forbes, “Wealthy Families: Consider These Planning Ideas Before ‘The Sunset.’”

Some state estate taxes are tied to federal estate taxes, so people of modest wealth should check with their estate planning attorney to be sure they are properly situated before the law changes. In addition, several strategies can be considered and applied to many tax brackets.

Charitable Giving. Instead of making a gift through a trust, you might consider donating cash to a charity. Under the 2017 law, the deductions for direct cash contributions jumped from 50% of AGI to 60%, including gifts to Donor-Advised Funds (DAFs). When the exemptions end, the limit will return to 50%, so if you are charitably inclined, making a cash gift now is a good idea.

Strategic Gifting. Assets depressed in value may have tax value as gifts. You might gift them to a beneficiary or a trust, so their appreciation may occur after they have been removed from your taxable estate. This creates two wins: the depressed assets will use less of your lifetime estate and gift tax exemption, and their future growth and possible increase in value will take place outside of the taxable estate.

“Substitution Powers” Assets. If you have transferred assets to grantor trusts with retained “substitution powers," consider moving low-basis assets out of trusts at a lower current value in exchange for higher-basis assets of equivalent value. This strategy could lessen capital gains on the lower-basis assets by returning them to the taxable estate and benefit from the step-up in basis at death. Talk with your estate planning attorney about how this might work for you.

Business Owner Planning. The Qualified Business Income (QBI) tax deduction created by the Tax Cuts and Jobs Act allows select pass-through entities, like sole proprietorships, partnerships, and S-corp owners, to deduct as much as 20% of business income. There are income thresholds and other limits to consider. However, this tax deduction ends on December 31, 2025. Accelerating income now could be of great value for business owners who qualify.

Basic Income Tax Planning. Income tax brackets will return to their levels before the TCJA law was enacted. The top bracket may increase to 39.6%, so you may not want to defer income. Middle tax brackets are also expected to expand.

Alternative Minimum Tax and Incentive Stock Options. The exemption amount for the AMT increased under the TCJ. However, this will also return to previous levels, making more taxpayers vulnerable to the AMT. One workaround is to exercise incentive stock options, which aren’t considered income for regular tax purposes but are considered income for AMT taxes. The AMT could be due in the year of exercise. If you can exercise before 2026, it could be a tax-savvy move.

Estate Planning Strategies. Planning needs to be flexible, since there is no way to know if Congress will or won’t act to renew TCJA. It may seem like there’s time to make any necessary changes. However, it takes time to create and execute a plan, which is why wealthy families are acting now to protect their assets.

Reference: Forbes (March 6, 2024) “Wealthy Families: Consider These Planning Ideas Before ‘The Sunset’”

How Can I Minimize Taxes During Retirement?

During your working years, your actions to minimize taxes aren’t the same as those you’ll need after retirement. How you manage your tax liability may have an even bigger impact during your non-working years, says a recent article, “5 Ways to Minimize Taxes on Retirement Income,” from U.S. News & World Report. Re-evaluating finances and tax liabilities at retirement age can help minimize taxes for the coming decades.

Roth Conversion. Once you’ve turned 59 ½ years old and the account has been opened for at least five years, you may take withdrawals tax-free at any time with no taxes or penalties. The conversion takes planning to avoid pitfalls. First, you must be prepared to pay the taxes on the converted accounts. You’ll also need to be careful not to place yourself in a higher tax bracket. Converting to a Roth should be done when income is lower.

Delay Social Security Benefits. When you start taking benefits will impact whether the amount you receive could be subject to taxes. If you file taxes single and your income is more than $25,000, you’ll pay taxes on as much as 85% of your Social Security benefit! Married couples with income exceeding $32,000 will suffer the same tax fate. If possible, delay taking Social Security until after you reach Full Retirement Age (FRA) which is 66 or 67 for most people. If you can delay taking benefits until age 70, you’ll have reached the maximum benefits, but circumstances don’t always allow this.

Coordinate Estate Planning with Required Minimum Distributions (RMD). After age 73, you’ll probably need to start taking RMDs from traditional IRAs and 401(k)s. If you forget, there will be penalties. If you take the RMDs, you must pay taxes on the income. Talk with your estate planning attorney to explore how you might keep your withdrawals within lower tax brackets to reduce your tax liability.

Consider Low-Tax States. If retirement relocation is in your future, consider state tax laws in your decision-making. Some states don’t tax Social Security benefits, while others provide exemptions for pensions. You’ll want to investigate income, sales and property taxes. Your analysis should include an overview of all the factors. For instance, a state may not tax Social Security, but it might have higher property taxes.

Create a Trust. Creating a trust removes assets from your taxable estate. Depending upon the trust your estate planning attorney recommends, you may need an irrevocable trust, which gives the trust the assets and control of the assets to the trustee. Income generated by the assets in the trust may be taxed at a different rate than your income.  

Estate planning and tax planning intersect in many ways, so speak with an experienced estate planning attorney to see what strategies are available and which are best suited to your situation.

Reference: U.S. News & World Report (March 14, 2024) “5 Ways to Minimize Taxes on Retirement Income”

Why Estate Planning Is Essential for Small Business Owners

Estate planning should be a top priority for anyone who has built and grown a successful small business, especially if they intend to build generational wealth and create a legacy. The title of a recent article from Business Insider says it all: “You might not want to think about estate planning, but as a financial planner, I know it’s essential for small-business owners.”

There are more complex issues for business owners than employees for estate planning. Therefore, be sure to work with an experienced estate planning attorney who will create a plan to protect you, your family and your business. As you go through the process, keep these basics in mind:

Last Will and Testament. This document is the foundation of an estate plan, providing directions to the state probate court regarding your wishes for distributing assets. It also names a guardian responsible for minor children upon your passing. If you don’t have a will, assets are distributed according to your state’s intestacy laws, typically based on kinship. You can update and change your will throughout your lifetime, and it should be reviewed every three to five years.

Revocable Living Trust. Having a revocable living trust gives you more control over assets, which could be necessary to distribute business assets. A revocable living trust can be altered while you are living, so changes in your business can be reflected in the directions in the trust.

Financial Power of Attorney. This document is critical if you are the business owner who performs most of the financial tasks of your business. When a business owner becomes incapacitated, having someone named Power of Attorney gives the POA the ability to pay bills, make bank deposits and withdrawals, file business and personal taxes and make any other financial decisions you wish. POA can be limited if you only want someone to pay bills, or they can be broad, allowing the agent to do anything you would do to keep the business running while you are incapacitated. Your estate planning attorney can craft a POA to suit your needs.

Business Succession Plan. A business succession plan should be in place as soon as your business gains traction and becomes successful. Distributing shares of the business after you pass is fine. However, what if your heirs don’t have a clue how the business works? Do you want them to sell it after you pass or maintain it for the next generation? A succession plan requires the help of an estate planning attorney, CPA and financial professionals to create a management team, define roles, set performance guidelines, etc.

Digital Estate Plan. We spend so much time online. However, few have plans for our digital assets. If your business is online, has a website, and uses social media, online finances, and cell phones, you need a digital estate plan to identify assets and provide instructions on what you want to be done with those assets after you have passed.

Review Beneficiary Designations. Any account that can name a beneficiary, such as retirement plans, investment accounts, or life insurance policies, must be reviewed every few years or whenever a trigger event, including birth, death, divorce, or remarriage. Upon your passing, these assets will be passed directly to the beneficiary. Be sure the person you named twenty years ago on your life insurance policy is still the right person to receive proceeds upon your passing.

An experienced estate planning attorney can review your current estate plan to ensure that it covers all bases for you and your business.

Reference: Business Insider (March 22, 2024) “You might not want to think about estate planning, but as a financial planner, I know it’s essential for small-business owners”

Have You had the Estate Planning Talk with Your Adult Children?

It’s easier to move a difficult matter forward when you have a plan, which is true when talking about estate planning with your family. Getting into the conversation can sometimes feel awkward. However, it’s best for all concerned to have open and honest discussions, according to a recent article, “How to Discuss Estate Planning with Your Family,” from Kiplinger.

If you have an estate plan, including a last will and testament, advanced care directive, living will, HIPAA release forms and other estate planning documents, make sure your family knows what documents you have prepared and where they are. Show them where your legal and financial records are kept, whether on your computer or filing cabinet.

Consider a kind of estate planning “boot camp” with the appropriate family members. They may not understand what a will does, how a trust works, etc. The more information they have about financial and legal matters, the better decisions they can make.

Connect family members with your advisors, including your estate planning attorney, financial advisor and CPA, so that they can work together after your passing.

How well do you expect family members to respond to this conversation? You know your family best, so be prepared—the daughter is prone to tears, and the son makes sarcastic comments—they will not suddenly become different people when the topic is estate planning.

The loss of a parent is a highly emotional time, and grief doesn’t always bring out the best in people. If you left a large inheritance and your children weren’t expecting it, will they know what to do? Or, if they expected a large inheritance and you decided to donate most of your wealth to charity, would they become embroiled in a legal battle with an organization that meant a lot to you? Having these difficult discussions in advance is better than leaving a legacy of surprise for loved ones.

If your children will be receiving different kinds of inheritance from you based on their individual circumstances, it is a great kindness to talk with them in advance about your reasoning. They may understand, or they may not. However, you may be able to prevent resentment and possibly litigation if they have an opportunity to learn about it from you directly while you are still living and when they can still ask questions.

Another topic requiring discussion is who you name to serve as executor. It may not be the oldest sibling, but it shouldn’t be the one who isn’t able to manage money or responsibilities. In some cases, a professional or family friend is better suited to serve as executor. Talk with your children about this decision to prevent any resentment between them.

These are not easy conversations, and they should be presented as ongoing discussions, so siblings or other family members feel they are included and respected. Your legacy and your family deserve as much.

Reference: Kiplinger (March 23, 2024) “How to Discuss Estate Planning with Your Family”

Do You Need Conservatorship or Power of Attorney?

There’s a long list of celebrities involved with conservatorship matters, although the thirteen-year conservatorship of Brittany Spears may have gotten the biggest headlines. A recent Paso Robles Daily News article, “Conservatorship or power of attorney? The answer it: it depends,” explains the difference.

A conservatorship occurs when a court appoints a person, the conservator, to oversee decision-making for another person. A conservatee is a person who has been deemed unable to make decisions for themselves or to care for themselves. Different states have different names for this process; in some states, it’s known as guardianship, and the appointed person is the guardian, with the person under their care known as their ward.

There are several different forms of conservatorship. They include:

• Of the estate, where the conservator has full authority over the person’s finances. The person may retain their physical autonomy but cannot access finances. Trusts are not included in this arrangement.
• Of the person, if the person has been found unable to make decisions about their life and physical health, including medical care but not medication for psychiatric care.
• Some states have specific conservatorships/guardianships designed to provide care by a conservator/guardian for people with mental health disorders.

A Power of Attorney gives one person many of the same abilities as a conservator, minus the involvement and required reporting to the court. The person who executes the POA must be legally able to do so; they cannot be incapacitated. The POA is useful for someone who is undergoing surgery, for instance, and knows they will be incapacitated in the future for a certain amount of time but wishes to have someone else take care of their affairs.

Similarly, an Advanced Health Care Directive (AHCD) gives another person the authority to make medical decisions on behalf of another person. Like a POA, the AHCD doesn’t require going to court to be executed.

Planning ahead and creating a Power of Attorney, Advanced Health Care Directive (sometimes referred to as a Power of Health Care Attorney), and other estate planning documents is how a responsible person ensures that their family is ready if something unexpected occurs. An estate planning attorney in your state can create these documents as part of your estate plan.

Reference: Paso Robles Daily News (March 12, 2024) “Conservatorship or power of attorney? The answer it: it depends”

Does Your Estate Plan and IRA Align with the SECURE Act?

It’s known as the SECURE Act—“Setting Every Community Up for Retirement Enhancement” Act of 2019. Some consider it more unsettling than secure, since this law changed withdrawal and tax rules for inherited IRAs for non-spouse beneficiaries. However, as reported by Think Advisor’s article, “9 Things to Know About IRA Beneficiaries Under the Secure Act,” the law led to other significant changes in estate planning.

The biggest headline is the end of the lifetime stretch for IRAs. Beneficiaries who are not spouses and don’t fall into specific categories and inherit a traditional IRA in 2020 or later must empty the account within ten years.

There’s a little bit of a wrinkle in the ten-year distribution rule. The experts initially said that heirs could take out as much or as little as they wished within ten years, including waiting until the very end of the ten years; the proposed regulations used the phrase “during,” meaning throughout the ten years. The IRS did not issue regulations until 2022, so the IRS waived Required Minimum Distributions (RMDs) for 2021, 2022, and 2023. This includes accounts inherited in 2022.

There’s a separate set of rules for nonqualified trusts and charitable entities—not people—to be aware of. If a traditional IRA owner or plan participant dies before the original owner would have been required to take their RMDs, the account must be emptied within five years. If the original owner dies on or after their RMD date, the rules require RMDs to be taken over the decedent’s single life expectancy. An estate planning attorney can guide you in avoiding paying unexpected taxes or penalties in these cases.

For a surviving spouse, there are numerous choices. They can take withdrawals as per the solo beneficiary framework, elect to take a spousal rollover, use the life expectancy numbers, or take a lump-sum distribution. Every situation is different and needs to be evaluated to determine which is best for the spouse.

A spouse who inherits a traditional IRA can do a spousal rollover, transferring funds into a new or existing IRA. You can only do this if the spouse is the only beneficiary. This method lets the IRA continue to grow, which is an attractive option if the surviving spouse is younger than the deceased spouse. If the spouse is under 59 ½, they’ll be subject to the regular IRA distribution rules.

There's a separate rule for spouses who are more than ten years younger. They’ll have to use the IRS joint and last survivor table. There’s no 10% early distribution penalty if they withdraw funds. One fine point: the account name must include the deceased owner's name to be sure it’s an “inherited” or “beneficiary” IRA.

If a minor inherits the IRA, they are considered a minor until they turn 21. They must also be the minor child of the original owner—not a nephew, niece, or family friend. The ten-year rule kicks in once they become a legal adult at age 21.

Disabled and chronically ill IRA beneficiaries are subject to separate rules. However, there are nuances to be aware of. They must have a condition and are unable to live a “normal” life (working, two activities of daily life, etc.). Their condition or disability must be one expected to result in death or long continued and indefinite duration.

Speak with an estate planning attorney before putting IRA assets into a trust. In most cases, trusts are not permitted to own IRAs if the original IRA owner is living. Certain trusts don’t qualify as eligible or non-eligible designated beneficiaries.

Reference: Think Advisor (March 11, 2024) “9 Things to Know About IRA Beneficiaries Under the Secure Act”

What You Need to Know about Social Security

For millions of Americans, a monthly Social Security deposit into their bank accounts is a crucial source of retirement income. For those who have just started receiving benefits, there are a few basics to know, according to a recent article from NASDAQ: “New to Social Security? 3 Things You Need to Know.”

Social Security knows inflation is a problem for seniors living on fixed incomes. If you’re receiving $1,800 a month right now, in five years, the same amount of money won’t have the same purchase power as it does today. Every year, Social Security examines inflation and adjusts benefits, known as the Cost Of Living Adjustment, or COLA.

COLA’s goal is to ensure that your buying power stays the same over time. It’s not a pre-set amount but is based on inflation data. Unlike an annuity, which increases at a certain rate, Social Security COLA rates are reviewed and increased depending on inflation data. There may be one year when benefits increase a lot, but there will also be years when increases are practically nil if inflation is low.

You may continue to work and receive Social Security benefits, but if you haven’t reached Full Retirement Age, your benefits will have an earnings test limit. Full Retirement Age is when you can collect your monthly benefit in full based on your past earnings history. After this date, based on your birthday date, you can earn as much as possible without any benefits being withheld.

If you’ve started taking benefits before that time, an earnings-test limit will deduct a certain amount from your benefits. The limit, like the COLA, changes every year. In 2024, it’s $22,320 or $59,520 for wage earners who will reach their FRA in 2024 but haven’t gotten there yet.

The funds are not lost forever if you earn more than the limit. When you reach FRA, the money will be returned to your monthly benefit. But you must consider the deduction if you’re creating a household budget.

Social Security does have serious challenges that may impact your benefits. The dramatic headlines about Social Security trust funds running out of money come in waves, but there are some real problems ahead to be aware of. The trust funds are expected to run dry in 2034. While a lot can happen in ten years, seniors would be wise to try to bank some of their benefits in case they shrink. The more saved, the easier it may be to manage if and when these cuts occur.

While Congress may always act to fund the trusts, working a part-time job or as a consultant in your field may be an excellent way for many retirees to prepare for any future cuts and reduce their dependency on Social Security benefits.

Reference: NASDAQ (March 18, 2024) “New to Social Security? 3 Things You Need to Know”

Estate Planning for a Taxing Inheritance

Estate planning should address tax planning to accomplish several goals. In addition to minimizing tax liability, tax-sensitive estate planning can ensure family members inheriting wealth are given a helpful asset, not a costly one. A recent article, “Inheriting Tax Liabilities” from Financial Advisor, explains how this can be done.

A beneficiary inheriting a pre-tax traditional IRA has to pay full state and federal income tax on any withdrawals, which must occur within ten years. Demographics show this inheritance most often occurs when the heirs are in their careers' highest tax income bracket, making it a double tax whammy.

There’s no step-up in basis for a traditional IRA. A $3 million IRA isn’t a $3 million IRA when it’s inherited. If the person inheriting the IRA is in a high-tax state and is also a high-income earner, they could lose nearly 45% every year when taking their required distributions.

The timeframe for IRA inheritances is tricky. Let’s say a couple works hard and saves in their tax-deferred 401(k) for three decades. When they retire, they roll those savings into traditional IRAs. When the second spouse dies, her children will probably be 55 to 60 years old, when people are usually in their highest earning and taxable years.

Another hitch: inherited IRA distributions can’t be donated to charity or kept in the IRA to be passed along to the heir’s children.

How to address this? It depends.

If there are two adult children and one has more modest wages and resides in a low-tax state, giving the lower-income heir a larger percentage of the IRA will result in a larger after-tax amount. If the other child is a high-income earner, bequeathing after-tax assets may make more sense. The two heirs may end up with the same amount when adjustments are made to their circumstances.

In some instances, it makes sense for the parents to convert traditional IRAs to Roth IRAs and pay the taxes to give heirs the advantages of the Roth IRA. Another strategy is to bequest pre-tax IRA assets to a charity and give heirs tax-free assets.

Think less about equal inheritances and more about adjusting assets to end up with the same spendable savings.

The same adjustments will be helpful when planning for illiquid assets like the family home. Preparing assets like real estate or art collections requires time, and the cost of commissions and marketing can reduce the inheritable value of the assets.

An inheritance is a gift to loved ones, improved by clear-sighted estate planning that considers the individual family’s circumstances in more depth. Review your family’s entire picture with your estate planning attorney so the end results will truly be what you wish.

Reference: Financial Advisor (March 15, 2024) “Inheriting Tax Liabilities”

Do I Pay Taxes on Wedding Gifts?

A generous gift for a child’s wedding doesn’t necessarily cause a tax problem unless your lifetime gifts are over the lifetime exclusion limit, which is extremely high right now. A recent article from Yahoo! Finance, “Do I Need to Worry About the Gift Tax If I Pay $60,000 Toward My Daughter’s Wedding?” says most Americans won’t have to worry about the gift tax.

In 2024, the lifetime exclusion is $13.61 million per person and $27.22 million for a married couple. Unless you’ve gone above and beyond these limits, you can make as many gifts as you like to anyone you choose without worrying or paying the 18% to 40% federal gift tax.

But there’s one thing to remember: if you make a gift over the annual gift limit, which is $18,000 per person in 2024 or $36,000 for a married couple, you need to send the IRS Form 709. The form should be submitted even if no gift taxes are due. It’s a simple and smart move.

How do gift taxes work? The federal gift tax doesn’t come into play often. Most gifts are tax-free simply because of the size of both the annual and lifetime gift exclusions. You can gift freely if you keep the limit in mind.

The lifetime exclusion for gift and estate taxes is so high right now that few Americans need to worry about it. If you are generously minded, you may gift $13.61 million (individual) and $27.22 million (married couple). The lifetime exclusion is just as it sounds: the number of gifts you may give during your life or as part of your federal estate.

If you are charitable-minded, you may make many contributions. There are no gift taxes levied on charitable donations, gifts to spouses or dependents, or gifts to political parties. As long as you pay directly to the institutions, there are no taxes on college tuition or healthcare expenses.

If you have a wedding coming up and are concerned about gift taxes, you can pay the vendors directly rather than giving money directly to the happy couple.

There are some strategies to manage the gift tax. One would be to split your $60,000 gift between your daughter and her fiancé. Both gifts would be under the 2024 $36,000 per person exclusion, assuming you are married, so there would not be a gift tax.

Another tactic is to spread the gift out over a few years. Let’s say you’re a single parent. You could gift your daughter and her fiancé $15,000 each this year and next, keeping you below the $18,000 annual gift tax exclusion.

If you’ve already given a gift of $60,000 to your daughter and made gifts over and above the $13.61 million lifetime exclusion, speak with your estate planning attorney to determine where you fall in the gift tax brackets and how much you’ll need to pay.

The easiest way to avoid gift taxes is to pay the vendors directly, but this depends on your overall situation. For instance, where is the money coming from—tax-deferred accounts or investment accounts? It would be wise to talk with your estate planning attorney before making a large gift.

Reference: Yahoo! Finance (March 14, 2024) “Do I Need to Worry About the Gift Tax If I Pay $60,000 Toward My Daughter’s Wedding?”

How Can You Prevent Legal Issues?

If you need an example of how laws change, says a recent article from Press-Telegram, “5 tips for handling legal issues,” just look at the decision from the U.S. District Court for the Northern District of Alabama issued on March 1. The Court ruled the Corporate Transparency Act of 2021 is unconstitutional. The rule required companies to report owners who benefited from a company to the Financial Crimes Enforcement Network division of the Department of Treasury.

What does that mean for you? It’s simply an example of how laws change on a big scale and a smaller scale. This is why estate planning attorneys ask their clients to have their estate plans reviewed every few years. Laws change, and opportunities may be missed.

Circumstances also change. The person you trust with your medical decisions during one part of your life may change through divorce, death, or a falling out. If your estate planning documents don’t reflect the change, you may be counting on someone you don’t even like to make critical medical decisions on your behalf if you become incapacitated.

Business matters change constantly, which is critical to address in succession plans. If you have a buy/sell agreement, for example, and haven’t updated the valuation of your business in ten years, your heirs may be selling the family business for a number that doesn’t make sense.

Any time there’s a big change in your life—like selling a business, creating a business, or considering changes to your estate plan—it’s best to speak with a trusted professional, including an estate planning attorney, financial advisor, and CPA. People often say they aren’t ready to tackle changes to their financial plans, estate plans, or businesses because it’s all too complicated. This is why we work with professionals—they simplify matters, clarify our goals, and help us move from concept to completion.

One common wish is to avoid having children, surviving spouses, and other family members squabbling over estates. Just as some people don’t consider stop signs to be more than a suggestion, others don’t feel legal documents apply to them. In some cases, having open and honest conversations with heirs can prevent some of the post-mortem fighting. In others, even a “no contest” clause doesn’t stop an angry person from pursuing litigation.

Having a properly created estate plan, one that is prepared for a possible estate battle is the best thing you can do in advance.

Legal documents, especially estate planning documents, are never “set it and forget it” documents. There are simply too many changes in life and the law.

Reference: Press-Telegram (March 10, 2024) “5 tips for handling legal issues”