Retirement Tax Planning 101

By pjain      Published June 6, 2019, 1:29 a.m. in blog Fin-Plan-Strategy   

Estate and Inheritance Taxes - Actionables, Key Factors and Lessons

Update your account POD or beneficiary designations - done outside of probate/wills

Many people don’t understand that a will or living trust document does not override beneficiary designations for life insurance policies, retirement accounts, and so forth.

As a general rule, whoever is named on the most-recent beneficiary form will get the money automatically if you die, regardless of what your will or living trust document might say.

HORRORS & PROBLEMS: if you’ve failed to update your beneficiary designations because you forgot, your have a will or living trust will NOT MATTER - your loved ones will have a problem.

BENEFIT: PODs on Accounts skip probate. Another advantage of designating beneficiaries is that it avoids probate — because the money goes directly to the beneficiaries you’ve named by operation of law.

PROBLEM: Don't name assets to go your estate. If you name your estate as your beneficiary and then depend on your will to parcel out assets to your intended heirs, your estate must go through the potentially time-consuming and expensive process of court-supervised probate. In recent past, often local county courts, real estate agents, attorneys and legal scams would siphon off huge percentages of YOUR money out, and your intended heirs, those you intended to get little or nothing, and other interested parties can throw up objections and roadblocks during the probate process. Probates can get ugly.

TIP: Name secondary beneficiaries not just primary - just in case! Name one or more secondary (contingent) beneficiaries to inherit if the primary beneficiary dies before you do. This is a common occurrence, especially years out, and you should take the possibility into account.

Federal Estate and Inheritance Taxes 101

Estate Taxes $11.4 single/$22.8m couple exemption

  • 2019 only - exempt below $11.4 m indiv, $22.8 m married couple.

Estate taxes are paid by the estate and based on the estate's overall value

Inheritance taxes are paid by an individual heir on whatever property they inherit.

  • Federal Estate Taxes for 2019 only - exempt below $11.4 m indiv, $22.8 m married couple.

Issue: Chances for Federal Estate tax bracket changes?

States trying to level between themselves

  • States have far lower limits and will take their pound of flesh, while Federal Estate Taxes for 2019 only are exempt below $11.4 m indiv, $22.8 m married couple.

  • A growing number of states are reducing or eliminating their death taxes to dissuade well-off retirees from moving to more tax-friendly jurisdictions, 12 states and the District of Columbia still impose an estate tax and six states have an inheritance tax on the books. (Maryland has both!)

Will YOUR retirement income or pension be taxed?

Capital Gains and Inheritance

Who holds the wealth - Boomers to get Bonanza?

In 2018, U.S. households held almost $100 trillion in household wealth. But that wealth is distributed unevenly among income groups. - Top 0.1% held ? - Top 1% holds 29% of total household wealth - Top 20% held 77% of total household wealth.

  • Top 5 US billionaires held as much wealth as bottom 50m+ Americans.

SRC: - Brookings Institution

Upper 1% Benefit from Low top Capital Gains

One of the causes of wealth and income inequality in the US is the top 0.1% derive most of this income from investments, on which the maximum tax on capital gains and dividends is now 23.8%.

Of course the wealthy also start companies and get stock options esp. as founders equity which is also taxed at capital gains tax rates.

The bottom 99% get most of their income from salaries or other forms of ordinary income which has the maximum tax rate of 40% on wages, equity options like RSUs and interest income.

Note: most employees of large companies like Apple, Microsoft get RSUs. Even for small startups often optioned employees often only get RSUs which are treated as ordinary income or salaries.

Capital Gains Sales are Discretionary

The Capital Gains tax is triggered only when an asset-owner realizes capital gains — which is a discretionary decision. If the rate on capital gains rises sharply, America’s wealthy will substantially slow the pace at which they sell their securities, real estate, and other capital assets.

Current 2019: Stepped up tax basis of capital assets at death

The current rules automatically step up the tax basis of capital assets at death. Under these rules much of the unrealized capital gains held by American householders will never be taxed as income.

Suppose when my grandpa was young, he bought land for $10,000 which was worth $1 million at the time of his death and bequeathed that land to my dad. If my dad were to sell it, his "cost" or basis would be $1m so he would unlikely have no tax on it.

Even if sales are made and profit has to be recognized, the tax realized could be very low as total exemptions (including inheritance and gift) are pretty high bars.

Bequests over MULTIPLE generations protects even more Assets and Gains Tax

The current step-up rule at death allows wealthy families to bequeath assets over multiple generations without ever paying capital gains tax.

Suppose when my grandpa was young, he bought land for $10,000 which was worth $1 million at the time of his death and bequeathed that land to my dad. If my dad were to sell it, his "cost" or basis would be $1m so he would unlikely have no tax on it.Then when my dad died, it was worth $5 m and I inherited it. My basis would be $5m and I would not recognize any capital gain because the tax basis of the land would automatically be stepped up to $5m. Further say 20 years later I give to my son and its value is now $15m that too would be stepped up.

So, if generations keep valuable stock or real estate assets for very long times, they can avoid ever paying taxes.

This step in basis allows wealthy families to pass down appreciated assets from generation to generation without ever paying capital gains taxes on these assets.

Issue What are chances of repeal of Stepped up Capital Gains on Death?

Repeal of this rule would also allow Congress to generate additional revenue by raising the tax rate on realized capital gains to equal the rate on ordinary income. If appreciated assets were subject to capital gains taxes at death, then wealthy families would be much more likely to sell such assets during their lives.

Why was Stepped Up basis passed?

Arguments for this were 1. the liquidity concerns for assets that would be subject to the capital gains taxes at death, wiping out a family's wealth and forcing them to sell house and everything to pay the estate tax bills - highly unpopular. 2. The other factor was family farms 3. Family businesses had to be liquidated instead of being allowed to continue 4. Claim that it is hard to value assets like collectibles, etc - assets which may not have a readily available market price, like stocks and bonds do. This is really weak as estates need to be valued already.

These concerns could be met by creating exclusions for personal jewelry, household furnishings, and primary residences. Also payment of capital gains taxes for the appreciation of family farms and small family-owned businesses could be delayed until the farm or business ceased to be family owned, or spread out over 10- or 15 years. This is similar to provisions when say equity in a family joint asset like a house, farm of business gets paid up from say one sibling to another.

Use of trusts

  • By putting assets in trusts and charities you can retain control of them, without paying taxes or even the capital gains taxes.

Use of charities

  • By putting assets in trusts and charities you can retain control of them, without paying taxes or even the capital gains taxes.


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