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Estate Planning Questions to Ask Yourself at the End of the Year
The end of each year is full of anticipation and trepidation for the next. And nothing quite causes the latter like knowing that the turning of the calendar brings with it all sorts of changes.
While running down the last few weeks in 2019, it’s prudent to look into tax and wealth management strategies worth pursuing before 2020 rolls around. Depending on your age and the stage of life you’re in, you might use this time to maximize your assets, distribute gifts and donations, or reorganize assets to get the most out of your retirement.
With 2020 fast approaching, take some time to ask yourself these questions about the state of your estate plan and any changes that may be required.
Should You Make Lifetime Gifts While Living?
Not everyone gives because they are looking to minimize their taxes. If you’ve reached the age and stage where you have accumulated more than enough wealth to retire on, you may enjoy being generous and seeing the impact your gifts can have on the lives of those you love, or those who are less fortunate.
WMUR’s recent article, “Money Matters: Lifetime non-charitable giving,” explains that lifetime giving means you dictate who gets your property. Remember, if you die without a will, the intestacy laws of the state will dictate who gets what. With a will, you can decide how you want your property distributed after your death. However, it’s true that even with a will, you won’t really know how the property is distributed, because a beneficiary could disclaim an inheritance. With lifetime giving, you have more control over how your assets are distributed.
Here’s How to Donate to Loved Ones and Avoid a Tax Bite
Basic rule: the more you give away, the smaller your estate and, therefore, the smaller your tax liability. If you’ve got a lot of wealth, this is a good time for you and those you want to make gifts to. The sooner you exploit this, the more you can give. It means that there’s less of a chance your estate will have to write a check to the IRS.
The Street’s recent article, “This Is the Golden Age of Tax-Free Gift Giving,” says the federal government has taxed estates since 1924, and as recently as 2001, the threshold when taxes kicked in was $675,000. This exemption level from taxation has been increased ever since. However, a large increase came from the Tax Cuts and Jobs Act, which took effect in 2018. The Act doubled the exemption level and indexed it to inflation. Anything above the new limits is taxed at 40%. It is $11.4 million for singles and $22.8 million for married couples in 2019.
How is My Estate Plan Impacted by the New Tax Law?
Anytime there is a major change in your life or in the law, it is wise to learn if your estate plan needs to be updated. This is particularly true, if your estate plan has not been reviewed since the new tax law went into effect, according to this article, “Talk to estate attorney about impacts of Tax Cuts and Jobs Act,” from The Kansas City Star.
A big change in the tax law is the doubling of the federal estate tax exemption from $5.49 million per person in 2017 to $11.18 million per person in 2018 (or $22.36 million per couple). In 2019, the federal estate tax exemption is $11.4 million per person (or $22.8 million per couple).
You should review any wills or trusts drafted prior to the passing of the 2017 legislation. If the trusts use formulas tied to the federal estate tax exemption, then there could be unintended ramifications because of the new larger exemption amount.
Paying for Special Needs Care Under the New Tax Laws
The financial needs of a loved one with special needs can be staggering for a family. According to the organization Autism Speaks, a lifetime of support for an autistic child can reach more than $2.3 million.
If you have a family member affected by a disability, what is your plan to pay for this care? This was the issue explored in a recent Financial Planning article, “A new special needs planning approach under the tax overhaul.”
Families usually want to plan for disabled relatives, but can be wary of losing access to savings, fearing that they may need the money themselves. A caretaker must also weigh the individual’s needs against the family’s other financial goals and obligations.
Can You Calculate Your Own Estate Taxes?
Even if you are not one of the top wealthiest people in the world, you still may find yourself grappling with estate taxes. If you know that you will be the recipient of an estate, you may need to have a candid conversation about the taxes that may result, and how to minimize them, if possible, beforehand. There’s more to be learned about the potential tax liability when an estate is transferred from the article “Estate Taxes: How to Calculate Them” from Investopedia.
The high rate of the federal estate tax (40%) motivates most people to calculate their potential estate tax beforehand. It’s a good idea to figure the amount you might owe in estate tax before something happens, instead of dealing with the consequences afterwards.
One Dozen Must-Have Documents
The last thing you want to do is leave a bureaucratic mess for your loved ones when you die. This will cause the family stress during a difficult time. That should be more than enough reason to get this done in advance!
US News & World Report’s recent article, “12 Documents to Prepare Now for Your Heirs,” says that when people don’t have their paperwork ready, it can be a huge headache for the family. A family can be left with all kinds of paperwork to sort out while dealing with grief. Even worse, heirs may forfeit life insurance proceeds and tax deductions or overlook accounts they don’t know exist. That’s why it’s critical to have important documents ready for loved ones, additionally, we at the Family Estate Planning firm have added an additional document (a revocable living trust), as many times this is the foundation of a sound estate plan to avoid probate and allow an orderly administration.
How Taking Social Security at 62 Makes Sense in Some Tax Brackets
It’s annoying. There’s no way around it. You’ve worked your whole life, and paid taxes on those earnings. Now you have to pay taxes on your Social Security benefits. However, depending on your asset level, you may want to start getting those benefits earlier, says this article from Kiplinger, “Why Wealthy People May Want to Take Social Security at 62.”
There are many good reasons to wait and take Social Security at full retirement age to get the full benefit amount. In waiting longer to file, the benefit can grow 8% a year from full retirement age to age 70. However, this one-size-fits-all advice may not be appropriate for everyone, especially for the wealthy.
Message to Americans Living in Canada: The IRS Hasn’t Forgotten You
Americans living in other countries still need to pay taxes to the U.S., and the IRS is very good about making sure they do. A well-respected Canadian newspaper, The Globe and Mail, recently explored the responsibilities of Americans living over the northern border in the article,“Americans living in Canada: Be aware that the IRS is watching you.”
Principal place of residence. When U.S. citizens sell their principal residence in Canada, they’re not taxed on the gain by the Canada Revenue Agency (CRA). However, the IRS will tax the portion of the gain that exceeds $250,000. The problem is that if there’s no capital gains tax paid in Canada, there are no foreign tax credits available to offset tax owed in the U.S.
