Presented by Fred Gaskin
One of the biggest risks retirees face is complacency. Leaning into purposeful activities and staying active are two ways we observe clients taking control of their days and living a full retirement. Unfortunately, we see too many folks become complacent about their financial affairs. Whether it involves their portfolios, or their estate planning, a little effort can make a very big difference.
For example, key provisions from the Tax Cuts and Jobs Act (TCJA) of 2017 are scheduled to sunset after 2025. If Congress and the president don’t act to extend them, estates and individual taxpayers alike may face higher taxes beginning in 2026. Fortunately, there are ways to protect yourself while the current laws are still in place. Here are few ideas to consider.
Estate tax planning
The current lifetime gift and estate tax exemption is $13.61 million per individual ($27.22 million for a married couple) in 2024, but that number could fall to roughly $7 million per individual (roughly $14 million for couples) in 2026.
If your estate value is greater than the potential future exemption, you might want to take steps to capture today’s higher limit, such as:
• Gifting highly appreciating assets: Transferring high-potential assets to loved ones while you’restill alive shrinks your taxable estate and moves any future appreciation to the assets’ new owners. Consider an individual whose estate consists solely of $10 million in stock that’s appreciating 5% annually. Under current law, this individual can use part of their exemption to make a $7 million tax-free gift, leaving them with a $3 million estate and nearly $7 million of remaining exemption. If they wait until 2026 and the tax law sunsets, their estate would then be worth $11 million, and even using the max exemption (roughly $7 million) leaves around $4million that would be subject to a 40% gift and estate tax—approximately $1.6 million.
Note that gifting appreciated assets during your lifetime means passing your original cost basis on the assets to your beneficiaries, which can result in significant capital gains if they sell them. Assets that are transferred upon death receive a step up in cost basis to the fair market value at that time.
• Establishing a dynasty trust: If you haven’t used up your lifetime gift and estate exemption, funding an irrevocable dynasty trust may allow you to avoid gift taxes on the original transfer—up to the current exemption limit. A dynasty trust also allows the assets to stay invested and potentially accumulate additional wealth for your heirs by avoiding the imposition of additional transfer taxes as new generations gain access to the trust. Beneficiaries of the trust will generally owe income tax on trust distributions.
Dynasty trusts are sophisticated legal structures, so be sure to consult a qualified estate-planning attorney about your particular situation.
Regardless of where the tax exemption lands, if you have the means and want to make gifts to your heirs, it’s also wise to take full advantage of your annual gift tax exclusion each year. In 2024, you can give away up to $18,000 per recipient ($36,000 for married couples) to an unlimited number of individuals without eating into your lifetime gift and estate tax exemption. Depending on the number of heirs you have, you could easily give away several hundred thousand dollars or more per year, making annual gifts a simple way to transfer considerable wealth outside of your estate entirely tax-free.
If you have college-bound heirs, you could also consider “superfunding” a 529 college savings account for each of them. This strategy allows you to contribute five years’ worth of the annual gift tax exclusion in a single year, so long as you file a gift tax return and treat the gifts as occurring over five consecutivetax years.
Income tax considerations
If the TCJA expires, many taxpayers will face higher taxes—especially those in the highest tax bracket, which will increase to 39.6% from the current rate of 37%. If future taxes are a concern, you might:
• Consider a Roth conversion: It may make sense to convert some or all of your traditional IRA or 401(k) retirement assets into a Roth IRA. You will owe taxes on the converted amounts in the year of the conversion, but at today’s rate, which is potentially lower than it will be in the future. When you take withdrawals from the Roth account in the future, you potentially won’t owe taxes on the principle or the earnings so long as you’re at least 59½ and have owned the account for five or more years. Be sure to discuss your specific circumstances with a qualified tax advisor before making a decision.
Without question, estate tax optimization can be very intimidating and complex, but hopefully the above ideas provide you with some straightforward and actionable ideas on how you can get started.
Fred Gaskin is the branch leader at the Charles Schwab Independent Branch in Bluffton. He has over 35 years of experience helping clients achieve their financial goals. Some content provided here has been compiled from previously published articles authored by various parties at Schwab.
Investing involves risk, including loss of principal.
Diversification strategies do not ensure a profit and do not protect against losses in declining markets.
Roth IRA conversions require a 5-year holding period before earnings can be withdrawn tax free and subsequent conversions will require their own 5-year holding period. In addition, earnings distributions prior to age 59 1/2 are subject to an early withdrawal penalty.
Employees of Schwab are not estate planning attorneys and cannot offer tax or legal advice or create and prepare legal documents associated with such plans. Where such advice is necessary or appropriate, please consult a qualified legal or tax advisor.
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