What’s the Best Way to Manage an Inheritance?

Inheriting wealth comes with its own set of challenges and emotions, whether it’s a modest amount or a significant amount. A recent article from Kiplinger, “Three Essential Strategies for Managing Your Inheritance,” explains three key considerations to help manage an inheritance responsibly.

Understanding tax implications. Taxes take a bite out of inherited wealth and require the help of an experienced estate planning attorney to guide you through the maze of taxes. The type of assets inherited, and the laws of your state will affect tax liabilities. For the most part, life insurance proceeds are tax-free. However, inherited retirement accounts, including traditional IRAs or 401(k)s, are not.

When the asset inherited is real property, there may be a benefit from a step-up in basis, which can minimize capital gains taxes if the decision is made to sell the property.

Federal estate tax exemptions are still extremely high. However, there may be state estate taxes or inheritance taxes to consider.

Confusion about taxes often occurs because the rules differ for diverse asset types. Inherited IRAs, for instance, may be taxed heavily if the withdrawals are not appropriately managed. Understanding the rules makes all the difference.

Investing? Act wisely. Sudden wealth often causes people to act irresponsibly. It’s tempting to take a risk with investments. However, wealth can evaporate very quickly if not managed with care and prudence. Before making any big financial decisions, evaluate your overall financial picture. Wealth may be best used to pay off debt, invest and save for the future.

If you don’t have an emergency fund, this is the time to establish one, enhance retirement savings and rid yourself of any debt. You’ll want to chart a course to balance growth with wealth preservation.

Make a long-term plan for the future. A large inheritance can substantially impact your life goals and retirement plans. It’s an excellent opportunity to reassess your finances and consider making adjustments. Is early retirement your goal? Are there charitable causes you’d like to support? If you have or plan to have children, could your inheritance be used for their college education?

An inheritance is also a time to ensure that your estate plan is in place. This includes trusts, wills and health care directives to manage and protect your wealth. An inheritance of any size requires estate planning to protect yourself and your family.

Estate planning goes beyond having a will. It’s about ensuring assets are distributed according to your wishes. Trusts are excellent tools for managing wealth and allow for control over how assets are used by future generations, in addition to providing tax benefits and creditor protection.

If you’re navigating an inheritance, take time to plan before you act. You’ll want to make wise choices to honor the legacy behind the inheritance while creating your own legacy.

Reference: Kiplinger (Dec. 8, 2023) “Three Essential Strategies for Managing Your Inheritance”

What Questions Should You Ask an Estate Planning Attorney?

To protect assets and health during life and facilitate a smooth transition of assets to loved ones after your death, an estate plan needs to address many different issues. This includes the laws of asset distribution in your state of residence, potential transfer taxes and costs and strategies required to expedite and simplify succession issues. A recent article from mondaq, “Four Questions To Ask Your Estate Planning Attorney,” explains key points to cover with your estate planning attorney.

How do assets pass after death? Some assets pass through the will, but not all. It depends upon where you live, where your assets are situated, what kind of assets they are and how they are titled. State law governs how assets are conveyed after death, so consulting with an estate planning attorney in your estate is critical to creating a successful plan.

If you live in a community property state, your property will pass to the surviving spouse, who is deemed to own one-half of the community property. In these states, one cannot leave more than half of their property through a will, as you only own half.

There may be rules in your area restricting asset transfers. Some states have forced heirship rules, which require a certain percentage of assets to be distributed to a spouse or children, while others have “elective share” rights for surviving spouses. This allows the spouse to elect to take a sizable portion of their deceased spouse’s assets.

What legal documents make up an estate plan? There are two categories of estate planning documents: those used during your lifetime and those used after you die. During your lifetime, you’ll need a healthcare proxy to permit another person to make medical decisions for you. A Power of Attorney allows an agent to make financial and legal decisions on your behalf. Without these documents, your family may need to apply to the court for guardianship, which is an arduous process.

Everyone needs a will and/or trust to transfer assets after death. Lacking a legally enforceable document directing the disposition of assets, they will pass according to the laws of your jurisdiction, which may not follow your wishes. Using a trust to distribute assets combined with a “pour over will” is another approach to minimize court involvement. A pour-over will provides direction for any assets not already in a living trust to be placed into the trust when you die, thus removing assets from your probate estate and allowing them to be distributed according to the terms of the will.

What tax planning needs to be done? Federal, state, inheritance and income taxes vary by state and are subject to change. Consult with an estate planning attorney about what the tax rules are for you and how to accomplish goals in a tax-minded manner. For instance, right now (for 2024), the federal exemption for estate and gift taxes is $13.610 million per person, but this will be cut in half on January 1, 2026, so it may be wise for you to make gifts now. Some states have their own estate taxes, and a few have inheritance taxes, which apply to heirs regardless of where they live.

Have there been any recent changes to the law impacting my estate plan? Changes occur frequently on federal and state levels, making regular updates to estate plans critical to their effectiveness. Your estate plan may not reflect recent tax changes if it is over three to five years old. In addition to tax laws, other laws may significantly impact an estate plan. Regular meetings to review your estate plan with an experienced estate planning attorney could also prevent your will from being declared invalid by the court, when your estate will be treated as if there was no will and the state’s laws will determine how your assets are distributed.

Reference: mondaq (Dec. 18, 2023) “Four Questions To Ask Your Estate Planning Attorney”

Taxes that Affect an Estate

Identifying the Taxes that Affect an Estate

Estate tax and inheritance tax significantly impact an estate’s value. Estate tax is levied on the estate’s total value at death before distribution to beneficiaries. In contrast, inheritance tax is imposed on the beneficiaries based on the value of assets received. Understanding these taxes is critical for effective estate planning.

What Is Inheritance Tax?

Inheritance tax varies by state and is paid by the recipient of the inheritance. States like Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania have specific exemptions and tax rates based on the beneficiary’s relationship with the deceased and the inheritance size.

Federal Estate Tax Explained

For 2024, the federal estate tax exemption is $13.61 million per individual, with estates exceeding this threshold taxed at up to 40%. Estates valued below this limit are exempt from federal estate taxes. High-net-worth individuals benefit significantly from these exemptions but must consider state-level estate taxes, which can vary.

Impact of Tax Rates on Estate Value

Estate tax rates range from 18% to 40%, meaning that taxes can diminish a substantial portion of an estate’s value. Effective estate planning, including trusts and lifetime gifting strategies, can minimize the estate’s taxable value.

Capital Gains Tax: An Important Consideration for Estates

Capital gains tax applies to profits made from selling inherited property or investments. If inherited assets appreciate and are then sold, the beneficiary may owe capital gains tax on the profits.

Minimizing Estate Taxes: Strategies and Tips

Strategies to minimize estate taxes include using both spouses’ estate tax exemptions, spending down assets, gifting and setting up trusts. These methods can reduce the estate’s taxable value, thus lowering the tax liability.

Estate Tax vs. Inheritance Tax: Understanding the Differences

The Estate pays estate tax based on its total value exceeding federal or state thresholds. Inheritance tax is paid by the beneficiary based on the inherited amount and their degree of kinship or lack thereof to the decedent. The key difference is who bears the tax burden – the estate or the inheritor.

How Estate Planning Can Mitigate Tax Impact

Proper estate planning can significantly mitigate the impact of taxes on an estate. An estate planning attorney can help explore various strategies, ensuring compliance with tax laws and maximizing available deductions and exemptions.

Conclusion: Navigating Taxes in Estate Planning

Navigating the complexities of taxes that affect an estate is essential for ensuring a smooth transfer of wealth. Individuals can effectively manage their estate’s tax burden by understanding and planning for both federal and state estate and inheritance taxes.

For personalized advice and to develop a comprehensive estate plan that navigates these tax considerations, schedule a consultation with our experienced estate planning attorneys today.

How Do Gifting Strategies Minimize Estate Taxes?

Understanding the role of strategic gifting provides an opportunity to significantly reduce estate tax liabilities, according to a recent article from Forbes, “6 Effective Gifting Strategies To Minimize Your Estate Taxes.” If your goal is to facilitate wealth transition across generations and preserve wealth, these will be useful to know and use.

The annual gift tax exclusion allows you to give generous gifts to as many people as you want without taxes. In 2023, the maximum amount is $17,000 per person and up to $34,000 for married couples filing jointly. In 2024, this increases to $18,000 per person and $36,000 for married. This provision is a foundation for reducing taxable estates. Your estate planning attorney may recommend setting up an annual gifting schedule or using special occasions like a wedding or the birth of a child to make gifts. You can reduce the eventual estate tax burden by systematically gifting within the exclusion limits each year.

A second strategy is maximizing the lifetime gift tax exemption. Unlike an annual gift, the lifetime gift tax exemption is a cumulative amount you may give away throughout your lifetime without incurring gift taxes. This IRS provision is especially useful for those who wish to transfer substantial wealth. In 2023, the limit is $12.92 million; in 2024, adjusted for inflation, the limit will be $13.61 million.

Using the lifetime exemption includes gifting assets expected to appreciate, like stocks or real property. By gifting these assets earlier, any future appreciations occur outside of your own estate, maximizing the impact of the exemption.

You can enhance this strategy by combining the lifetime exemption with the annual gift tax exclusion. For example, parents might gift their children a portion of their estate annually, staying within the annual exclusion limit, and then use their lifetime exemption for larger gifts.

Medical and educational exclusions allow you to pay for another person’s tuition or medical expenses. The payments must be made directly to the institution and not the individual. Following this important rule allows you to avoid incurring any gift tax or having the amount impact the annual exclusion limit of lifetime exemptions. These payments can only cover tuition and direct medical expenses, not related costs like books or room and board.

Trusts can be used for gifting, allowing you to manage and distribute assets according to your own terms. Your estate planning attorney will be able to guide you to what best suits your situation. For instance, an Irrevocable Life Insurance Trust shelters life insurance proceeds from estate taxes, effectively reducing the taxable estate size. A Grantor Retained Annuity Trust can transfer appreciating assets to beneficiaries, while providing the grantor a fixed annuity, potentially reducing gift taxes.

There is also the Charitable Remainder Trust, which provides income to the donor and later benefits a charity, resulting in income and estate tax advantages.

Charitable giving has long been a favored way to do good while obtaining valuable tax benefits. One approach is to use donor-advised funds, which allow for a charitable contribution, getting an immediate tax deduction, and then recommending grants from the fund over time. Making pledges or binding promises to give to charities can also create current tax deductions while committing to the future of your charity of choice.

Timing gifts and their frequency can have implications for the donor and recipient. Strategic timing needs to address asset value fluctuations and tax law changes. Timing involves market conditions, life events, or anticipated changes in legislation.

The frequency of gifting can also be critical in estate planning. Regular, systematic gifting can steadily reduce the size of the estate, potentially leading to significant tax reductions over time. Be mindful about balancing gifting with personal financial needs to not overextend yourself.

Reference: Forbes (Nov. 25, 2023) “6 Effective Gifting Strategies To Minimize Your Estate Taxes”

Navigating Estate Tax Planning

Navigating the intricacies of your financial legacy can be a daunting task. Understanding the nuances of the estate tax and implementing robust estate tax planning strategies can ensure that your beneficiaries enjoy the fruits of your labor without being overburdened by tax liabilities.

What Is Estate Tax and Who Is Subject to Estate Tax?

The estate tax, often called the “death tax,” is a tax levied on the total value of a person’s estate upon their death. If the estate exceeds certain thresholds, it becomes subject to federal estate tax, potentially diminishing the wealth passed on to heirs.

Understanding who is subject to estate tax requires knowledge of current tax laws, which often change. These laws dictate specific exemption amounts and continually adjust what constitutes a taxable estate.

Why Is Estate Tax Planning Essential?

Proactive estate tax planning is crucial to preventing your heirs from facing unexpected tax burdens. Without careful planning, a significant portion of the estate you’ve worked hard to build could end up in the hands of the government, instead of your loved ones.

Tax planning involves a comprehensive look at your assets and potential tax liabilities, ensuring that your beneficiaries are safeguarded. The goal is to reduce estate tax significantly, allowing more wealth to transition to the next generation.

How Can Trusts Benefit Your Estate Plan?

Incorporating trusts into your estate plan can be a strategic move to minimize estate taxes. Trusts, particularly irrevocable ones, allow you to transfer wealth from your estate, reducing the overall value subject to estate taxes upon your death.

Trusts offer control over assets even after death, ensuring that your wishes concerning asset distribution are honored. Grantor trusts and other types of trust arrangements are advanced estate planning tools that can significantly reduce your taxable estate.

Are Gift Taxes and Estate Taxes Interconnected?

Yes, gift taxes and estate taxes are closely linked. Strategically gifting assets during your lifetime can reduce your estate’s size, subsequently decreasing estate tax liability. However, it’s essential to understand the gift tax exclusion limits in your tax planning.

Large gifts that exceed these exclusions may still be taxable. These count towards your estate and are potentially subject to estate tax if they surpass the lifetime exemption limit. It’s wise to consider the long-term implications of gifting on your overall estate.

What Changes in Tax Laws Mean for Your Estate Planning Strategies?

Estate tax laws are not static; they undergo changes and adjustments that could impact your estate. These changes in tax laws could influence exemption thresholds, tax rates and what assets are considered part of your taxable estate.

Keeping abreast of these changes is critical. Working with a tax professional who understands the latest federal estate tax laws ensures that your estate plan remains effective and compliant, safeguarding your estate from increased tax liability.

Can You Minimize Estate Taxes with Charitable Contributions?

Making charitable contributions is an effective strategy to minimize estate taxes. Donations to qualifying charitable organizations can reduce your taxable estate’s size, while allowing you to contribute to causes you care about.

This estate planning tool requires proper documentation and adherence to tax laws to ensure that your estate benefits from the tax reductions applicable to charitable contributions.

Do All States Impose Own Estate Taxes?

The estate tax isn’t just a federal matter. Several states impose their own estate taxes, with exemption thresholds and tax rates that differ from federal guidelines. State estate taxes can complicate estate planning, especially if you own assets in multiple states.

Understanding how state tax laws affect your estate is crucial. It involves complex considerations, particularly if you’re planning for properties in states with distinct estate or inheritance taxes.

How Does the Tax Cuts and Jobs Act Affect Estate Tax Planning?

The Tax Cuts and Jobs Act significantly impacted estate tax planning by increasing the federal estate tax exemption. This change means fewer estates will be subject to the estate tax. However, it is essential to remember that many parts of the Jobs Act are temporary.

Estate plans should consider future changes, possibly with lower exemptions. Careful planning and continual review of your estate strategy are necessary to adapt to legislative shifts and protect your estate from excessive taxation.

Closing Thoughts: Estate Tax Planning Takeaways

To encapsulate, here are the key points to remember in your estate tax planning journey:

Understand the implications of the estate tax on your assets.
Utilize trusts and lifetime gifts strategically to reduce estate size.
Keep updated with changes in tax laws, including state estate taxes.
Consider charitable contributions as part of your estate strategy.
Consult with a tax professional to navigate complex estate scenarios.

Effective estate tax planning can preserve your wealth for future generations, ensuring that your legacy endures as you envision.

When Should You Update Your Estate Plan?

We know we need to see our doctor for annual checkups and see the dentist every six months, not to mention getting a good night’s sleep, brushing and flossing our teeth. In the same way, your estate plan needs regular maintenance, according to an article from The Street, which asks, “When Is It Time to Update Your Estate Plan?”

Far too often, estate plans are created with the best intentions and then lie dormant, in many cases, for decades. Provisions no longer make sense, or people in key roles, like executors, either move away or die.

Failing to update an estate plan can lead to a beloved child being disinherited or an animal companion ending up in a shelter.

This is an easy problem to solve. However, it requires taking action. Scanning your estate plan once a year won’t take long. However, when certain events occur, it’s time to bring all your estate planning documents to an estate planning attorney’s office.

Here are a few trigger events when you may want to make changes:

Welcoming a new child into the family. Wills and trusts often contemplate future children. However, when the children arrive, you’ll need to update wills, trusts and beneficiary designations. Life insurance policies, investment accounts and retirement accounts allow you to name a beneficiary, and the proceeds from these accounts go directly to the beneficiaries, bypassing probate.

If no beneficiary is named or cannot be located, the asset usually goes back into the estate, meaning it goes through probate and there may be tax liabilities.

Charitable giving goals often change over time. An organization with great personal meaning in your twenties may be less important or may have closed. If you’ve become involved with a charitable mission and want to leave assets to the organization, you’ll want to create a charitable bequest in your will or trust. Those changes need to be reflected in your estate plan.

People’s ability to serve in fiduciary roles may have changed. If the people you assigned certain roles to—like trustees, executors, agents, or the guardian named for minor children—may no longer be suitable for the role. The person you selected to serve as a guardian for minor children may not be available or willing to manage adolescents. If your trustees are over 70, you may want to name an adult child to serve in this role.

Reviewing insurance policies needs to be done regularly. In some cases, the value of life insurance proceeds may be subject to estate tax. Proper planning should be able to avoid this by making certain the policy is not included in your taxable estate.

If you are considering taking out a new life insurance policy, revisit your existing plans with your estate planning attorney. It may make sense for you to create an insurance trust, which allows you to exempt certain assets from your taxable estate.

Are pets an important part of your life? If so, you may want to make plans for who should take care of your pet if you pass away. In many cases, a pet trust works to name a trustee to manage funds for the pet’s care and formally outlines how you want your pet to be cared for.

Reviewing your estate plan every three to five years with your estate planning attorney or whenever a significant life event occurs will ensure that your wishes are followed.

Reference: The Street (Oct. 30, 2023) “When Is It Time to Update Your Estate Plan?”

Avoiding the Pitfalls: Retirement Planning Mistakes to Avoid

Planning for your golden years is no small feat. A robust retirement plan is a treasure map to comfort and security in your later life. However, the road to a stress-free retirement is often littered with potential mistakes. Identifying common retirement planning mistakes and knowing the mistakes to avoid can save future retirees from headaches and financial instability.

Are You Underestimating Health Care Expenses When Your Retire?

One retirement mistake made often is underestimating health care costs. It’s easy to overlook long-term care and other health expenses, especially if you’re currently in good health. However, healthcare expenses can deplete your retirement savings faster than anticipated.

As you age, healthcare becomes an integral part of your expenses. Considering potential needs like long-term care, which Medicare does not usually cover, is crucial. Working with a financial planner can help you factor these costs into your retirement plan, ensuring your nest egg is equipped to handle future medical expenses.

Is Your Investment Portfolio Too Aggressive or Conservative?

Your investment strategy plays a pivotal role in your financial security. One of the common retirement mistakes is maintaining an inappropriate investment risk level. As you approach retirement, financial advisors often recommend gradually shifting towards more conservative investments to preserve capital. However, being overly cautious can also impede the growth of your retirement savings.

Discussing your risk tolerance and retirement timeline with a financial advisor is essential. They can help rebalance your portfolio to protect your assets, while still capitalizing on market opportunities.

Have You Neglected Tax Planning?

Tax planning is often overlooked in retirement planning, which can lead to unexpected tax burdens on your retirement income. Without proper planning, everything from social security benefits to withdrawals from your retirement account could be taxed, significantly shrinking your usable income.

Strategies like investing in Roth IRAs, where qualified withdrawals are tax-free, or setting aside funds to handle tax obligations, can be beneficial. It’s advisable to consult with a financial advisor or someone who can provide tax or legal advice to optimize your retirement plan for tax efficiency.

Do You Rely Solely on Social Security Benefits at Full Retirement Age?

A common mistake is assuming that social security benefits will be sufficient as your sole source of income. However, these benefits are designed to supplement your retirement savings account and usually don’t suffice for a comfortable retirement on their own.

It’s essential to have additional sources of income. Strategies like investing, setting up annuities, or continuing part-time work can help ensure a steady income flow throughout retirement, enhancing your financial security.

Are You Withdrawing Too Much, Too Soon?

Careful planning for how much you withdraw in the early years of retirement ensures that you don’t outlive your savings. Retirees sometimes start by withdrawing larger amounts. However, this approach can compromise their financial health in the later stages of retirement.

Setting a sustainable withdrawal rate as part of your retirement plan, considering factors like life expectancy and inflation, is prudent. Financial planners recommend the “4% rule” as a starting point, adjusting as necessary based on individual circumstances and market conditions.

Have You Failed to Consider Inflation?

Inflation can erode the purchasing power of your retirement savings over time, a reality that retirees cannot afford to ignore. A common retirement mistake is failing to factor inflation into retirement planning.

Investing in inflation-protected securities or assets that tend to increase in value over time can help your savings grow in step with or outpace inflation. Regular consultations with your financial advisor can help adjust your strategies to mitigate inflation’s impact.

Did You Forget to Plan Your Estate?

Beyond securing your lifestyle post-retirement, it is also essential to consider how your assets will be distributed upon your death. Without an estate plan, your heirs may not receive the assets you intend to leave them, and legal complications could arise.

Estate planning involves setting up wills, trusts and designating beneficiaries, ensuring that your wishes are honored. Discussing your desires with an experienced estate planning attorney will help ensure that your estate plan is comprehensive and legally sound.

Summary: Key Takeaways to Avoid Mistakes in Retirement

To wrap up, here are the essential points to remember:

Plan for health care costs: Factor in expenses like long-term care and unexpected medical bills.
Balance your investment portfolio: Ensure your investments align with your risk tolerance and retirement timeline.
Don’t neglect tax planning: Understand potential tax obligations on your retirement income.
Supplement social security benefits: Identify additional income sources to bolster your social security income.
Adopt a sustainable withdrawal rate: Use strategies like the “4% rule” to avoid depleting your savings prematurely.
Protect against inflation: Invest in assets that can counteract the rising cost of living.
Establish an estate plan: Prepare the legal mechanisms for asset distribution after your death.

Incorporating these strategies can help you avoid the pitfalls as you plan for retirement and set you on a path to a comfortable and secure retirement.

Does Your State Have an Inheritance Tax?

Most Americans aren’t concerned with the $12.92 million threshold for the federal estate tax. However, some states are not as generous with estate tax exemptions, and others impose inheritance taxes on heirs, reports the article “States That Won’t Tax Your Death” from Kiplinger. State death taxes can become expensive for loved ones.

Death taxes are tax liabilities incurred by heirs when you die. In some states, heirs pay death taxes on even small inheritances. For example, heirs in Nebraska pay a death tax rate of 15% on inheritances over $25,000. The good news is that if you live in a state with no estate or inheritance tax, you don’t have to worry about a state death tax.

If taxes are a big consideration for where you live, consider the pros and cons before making any big decisions. Not every state is as tax-friendly regarding other taxes, fees, or the overall cost of living.

Alabama has no death taxes and low grocery taxes.
Alaska has no death taxes, and Alaska pays residents to live in the state through the Permanent Fund Dividend. In 2023, the payment was $1,312.
Arizona has no death tax, low-income taxes and a flat income rate of 2.5%.
Arkansas has no estate or death taxes, and a recent tax cut bill reduced income taxes.
California is generally a high-tax state with high costs of living, but there is no death tax.
Colorado has no death tax and the highest EV credit of any state.
Delaware is known to be very business friendly. However, it’s also a state with no sales tax, no state estate tax and no inheritance tax.
Florida has no death taxes, and what appeals to many new arrivals is no state income tax.
Georgia has no estate or inheritance tax.
Idaho doesn’t have an inheritance tax, but some types of retirement income, including pensions, are taxable.
Indiana has no inheritance tax and a fairly low flat-income tax rate of 3.15% (although some counties impose income taxes of their own).
Kansas has no inheritance tax or estate tax.
Louisiana has no death taxes and some of the lowest property taxes in the country.
Michigan has no estate tax or inheritance tax.
Mississippi taxes groceries but has no death tax or estate tax.
Missouri has no state death tax.
Montana has no state death tax.
Nevada has no inheritance taxes and no income tax.
New Hampshire doesn’t have a death tax, and there’s no personal income tax, but there is a tax on interest in dividends.
New Mexico has no estate or inheritance tax.
North Carolina has no death taxes and low property taxes.
North Dakota has no estate or inheritance tax, and the highest income tax rate is 2.5%.
Ohio has no death taxes but does have high property taxes.
Oklahoma has no death tax; low property and income tax rates never reach 5%.
South Carolina has no death tax or inheritance tax.
South Dakota has no inheritance tax and no state income taxes.
Tennessee has no estate, inheritance, or income tax.
Texas has no income tax and no inheritance tax.
Utah has no death tax but is one of 11 states that taxes Social Security retirement benefits.
Virginia has high income tax rates but no inheritance or state estate taxes.
West Virginia has no death tax.
Wisconsin has no death or state estate taxes. However, property and income tax rates are high.
Kiplinger ranks Wyoming as one of the best states for middle-class families because of the state’s overall low tax burden. There’s also no inheritance tax.

Reference: Kiplinger (Oct. 12, 2023) “States That Won’t Tax Your Death”

Estate Planning and Tax Planning for Business Owners

Business owners who want long-term financial success must navigate an intricate web of taxes, estate planning and asset protection. Pre- and post-transactional tax strategies, combined with estate planning, can safeguard assets, optimize tax positions and help strategically pass wealth along to future generations or charitable organizations, as reported in a recent article from Forbes, “Strategic Tax and Estate Planning For Business Owners.”

Pre-transactional tax planning includes reviewing the business entity structure to align it with tax objectives. For example, converting to a Limited Liability Company (LLC) may be a better structure if it is currently a solo proprietorship.

Implementing qualified retirement plans, like 401(k)s and defined benefit plans, gives tax advantages for owners and is attractive to employees. Contributions are typically tax-deductible, offering immediate tax savings.

There are federal, state, and local tax credits and incentives to reduce tax liability, all requiring careful research to be sure they are legitimate tax planning strategies. Overly aggressive practices can lead to audits, penalties, and reputational damage.

After a transaction, shielding assets becomes even more critical. Establishing a limited liability entity, like a Family Limited Partnership (FLP), may be helpful to protect assets.

Remember to keep personal and business assets separate to avoid putting asset protection efforts at risk. Review and update asset protection strategies when there are changes in your personal or business life or new laws that may provide new opportunities.

Developing a succession plan is critical to ensure that the transition of a family business from one to the next. Be honest about family dynamics and individual capabilities. Start early and work with an experienced estate planning attorney to align the succession and tax plan with your overall estate plan.

Philanthropy positively impacts, establishes, or builds on an existing legacy and creates tax advantages. Donating appreciated assets, using charitable trusts, or creating a private foundation can all achieve personal goals while attaining tax benefits.

Estate taxes can erode the value of wealth when transferring it to the next generation. Gifting, trusts, or life insurance are all means of minimizing estate taxes and preserving wealth. Your estate planning attorney will know about estate tax exemption limits and changes coming soon. They will advise you about gifting assets during your lifetime, using annual gift exclusions, and determine if lifetime gifts should be used to generate estate tax benefits.

Reference: Forbes (Sep. 28, 2023) “Strategic Tax and Estate Planning For Business Owners”

Why You Need to Include Digital Assets in Your Estate Plan

A new form of wealth, with different ownership, storage, and transferability terms, has created a new challenge for estate planning from traditional forms of wealth. These are digital assets, electronic records in which an individual has a right or interest, as explained in a recent article, “Planning for Digital Assets 101,” from Wealth Management.

Digital assets can be divided into two groups: sentimental digital assets and investment digital assets.

Sentimental digital assets are those with an emotional tie, like photos, videos, social media accounts, etc. For these assets, the goal is to provide access to loved ones after a person’s death. Some platforms allow settings to name a legacy contact. A list of accounts, usernames and passwords will be helpful for family members.

The IRS defines investment digital assets as “any digital representation of value which is recorded on a cryptographically secured distributed ledger, like a blockchain, or any similar technology as specified by the Secretary.” This type of asset includes cryptocurrency, stablecoins and non-fungible tokens.

The challenge of digital investment assets in estate planning centers on how they are owned and stored.

Digital assets are stored in digital wallets, web-based or hardware-based. “Hot wallets” are web-based and run on smartphones or computers. Many investors use them for small amounts of cryptocurrency and frequent trading. “Cold wallets” are hardware-based wallets stored on devices not connected to the internet, reducing the risk of unauthorized access. A cold wallet can only communicate with an internet-connected device when plugged in. An investor will have a seed phrase or backup code to access the cold wallet, which the owner must store in a secure place.

Understanding the storage system is essential for estate planning for two main reasons:

Beneficiary Access. The recipient of a gift or bequest of the digital asset must have access to the relevant storage device to access the actual investment. Sharing this information comes with an element of risk, as access is inherently tied to value.

Fiduciary Access. If only the owner has access, heirs will have no way to gain access to the digital assets when the owner dies. Digital exchanges don’t allow users to name a contact to access the investment information upon death. Most exchanges don’t have centralized entities to record information. If access is denied to the heir, the investment could be lost.

Transferring digital assets requires providing access to beneficiaries and/or fiduciaries. There are several ways to structure such a transfer while minimizing the risk of theft or loss.

Digital assets can be transferred to a Limited Liability Company, and subject to certain limitations, retain control of the digital assets’ management by serving as LLC manager. Transferred LLC interests can also provide a mechanism to discount the value of the transferred interest. In addition, LLCs can provide asset protection since, in most states, LLCs protect a member’s personal assets from an LLC’s liabilities.

A directed trust is another way to transfer digital assets, while maintaining control and decision-making with the owner. In some states, a directed trust can have an “investment trustee” or “investment trust director” to exclusively handle investment responsibilities, including managing and storing digital assets.

Even using these two methods, someone other than the original owner must be granted access to the digital assets. One way to do this is by naming a “digital fiduciary”—someone tasked with managing the digital assets.

Estate plans involving digital assets must clearly outline heirs for the digital investment and its tangible storage devices. The assets can pass with the residuary, and complexities can arise if the residuary beneficiaries differ from tangible property beneficiaries who will receive the storage device. Speak with an experienced estate planning attorney to be sure that your digital assets are included in your estate plan.

Reference: Wealth Management (Sep. 19, 2023) “Planning for Digital Assets 101”

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