While death is a certainty, some taxes aren’t when IRAs are used to make charitable bequests, explains a thought-provoking article titled “Win an Income-Tax Trifecta With Charitable Donations” from The Wall Street Journal. For those who are philanthropically minded and tax-savvy, this is an idea worth considering.

There are few better ways to leave funds to a charity than through traditional IRAs. The strategy is especially noteworthy now, given the growth in traditional IRA values over the last decade, even with the recent selloffs in bond and stock markets. At the end of 2022’s first quarter, traditional IRAs held about $11 trillion, more than double the $5 trillion in IRAs at the end of 2012.

With the demise of defined benefit pensions, traditional IRAs are now the largest financial account many people own, especially boomers. Therefore, it’s wise to know about applicable tax strategies.

The first advantage is tax efficiency. Donors of IRA assets at death win a three-way tax prize: no tax on the contributions going to the charity, no tax on annual growth and no tax on assets at death.

Compare this to donations of cash or investments, such as a stock held in a taxable account. For example, let’s say Jules wants to leave a total of $20,000 to several charities upon her death. She expects to have more than $20,000 in each of three accounts at this time. One account is cash, the other is a traditional IRA, holding stocks and funds, and the third is a taxable investment account holding stocks purchased decades ago.

A charitable bequest of assets from any of these three accounts will bring a federal estate-tax deduction. However, Jules’ estate will be smaller than the current estate tax exemption of about $12 million, so there are no federal estate taxes to consider.

Jules should focus on minimizing heirs’ income taxes on any assets she’s leaving them and donating traditional IRA assets is the way to go. If she leaves the IRA assets to heirs, they will have to empty the IRA within ten years and withdrawals will be taxable.

Giving IRA assets gets pretax dollars directly to the charities, which don’t pay taxes on the donation. A cash donation would be after tax dollars.

Donating the IRA assets to charity is also typically better than giving stock held in a taxable account. Because of the step-up provision, there is no capital gains on such investment assets held at death. If Jules bought the now $20,000 stock for $5,000, the step-up could save heirs capital gains tax on $15,000 when they sell the shares. If she donates the stock, heirs won’t get this valuable benefit.

Next, IRA donations allow for great flexibility. Circumstances in life change, so a will that is drawn up years before death could be changed over time, to give a bequest of a different size or to a different charity. It’s easier to make these changes with an IRA. One way is to set up a dedicated IRA naming one or more charities as beneficiaries and then moving assets from other IRAs into it via direct (and tax-free) transfers. Beneficiaries and the percentages can be easily changed, and the IRA owner can raise or lower the donation by transferring assets between IRAs.

If the IRA owner is 72 or older and has to take required minimum distributions, the owner can take out donations from different IRAs. Note the funds must go directly to the charity when making the donation.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “Can I Use an IRA to Reduce Estate Taxes?” read also these additional articles: Do I Need a Prenup? and Can a 529 Plan Help with Estate Planning? and Can You Prevent Family Fights over Inheritance? and Top Five Estate Planning Mistakes

Reference: The Wall Street Journal (Sep. 2, 2022) “Win an Income-Tax Trifecta With Charitable Donations”

Inheritance battles can create new conflicts, inflame long-standing resentments and squander assets intended to make heir’s lives better. What can families do to prevent estate battles when a loved one’s intentions aren’t accepted is the question asked by the recent article, “Warning Signs Of Estate Disputes—And Ways to Avoid Them,” from mondaq.com.

Here are the more common scenarios leading to family estate battles:

• Siblings who are always fighting over something
• Second or third marriages
• Disparate treatment of children, whether real or perceived
• Mental illness or additional issues
• Isolation or estrangement
• Economic hardship

There are steps to take to minimize, if not eliminate the likelihood of estate battles. The most important is to have an estate plan in place, including all the necessary documents to clearly indicate your wishes. You may want to include a letter of intent, which is not a legally enforceable document. However, it can support the wishes expressed in estate planning documents.

Update the Estate Plan. Does your estate plan still achieve the desired outcome? This is especially important if the family has experienced big changes to finances or relationships. An estate plan from ten years ago may not reflect current circumstances.

Make Distributions Now. For some families, giving with “warm hands” is a gratifying experience and can remove wealth from the estate to avoid battles as everything’s already been given away. The pleasure of seeing families enjoy the fruits of your labor is not to be underestimated, like a granddaughter who is able to buy a home of her own or an entrepreneurial loved one getting help in a business venture.  However, make sure that if you make distributions now, it comports with an effective income tax strategy.  You don’t want to give heirs a big capital gains tax bill with the “gift”.  There may be a better way to distribute appreciated assets with built-in capital gains.

Appoint a Non-Family Member as a Trustee. Warring factions within a family are not likely to resolve things on their own, especially when cash is at stake. Appointing a family member as a trustee could cause them to become a lightning rod for all of the family’s tensions. Without the confidence of beneficiaries, accusations of self-dealing or an innocent mistake could lead to litigation. Removing the emotions by having a non-family member serve as a professional trustee can lessen suspicion and decrease the chances of legal disputes.

Communicate, with a facilitator, if necessary. Families with a history of disputes often do better when a professional is involved. Depending on the severity of the dynamics, this could range from annual meetings with an estate planning attorney to explain how the estate plan works and have discussions about the parent’s wishes to monthly meetings with a family counselor.

A No-Contest Clause. For some families, a no-contest clause in the will can head off any issues from the start. If people are especially litigious, however, this may not be enough to stop them from pursuing a case. An experienced estate planning attorney will be able to recommend the use of this provision, based on knowing the family and how much wealth is involved.

Addressing the problem now. The biggest mistake is to sweep the issue under the proverbial rug and “let them fight over it when I’m gone.” A better legacy is to address the problem of the family squabbles and know you’ve done the right thing.

Efforts to bring families together and prepare for the future will allow parents, children and grandchildren to enjoy their remaining time together.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “Can You Prevent Family Fights over Inheritance?” read also these additional articles: Top Five Estate Planning Mistakes and What Do You Need to Do When a Spouse Dies? and What If Estate Is Beneficiary of an IRA? and Will Making a Gift Conflict with Medicaid?

Reference: mondaq.com (Nov. 4, 2022) “Warning Signs Of Estate Disputes—And Ways to Avoid Them”

Everyone should have an estate plan, whether it’s a simple will or a detailed and complex one with trusts and strategies for multiple generations. The more care and thought put into the plan, says a recent article, “5 Common Estate Planning Mistakes to Avoid” from Kiplinger, the better the outcome. There are some common mistakes you can avoid with a little foreknowledge.

Failing to plan for incapacity. People think about creating wills and trusts with their mortality in mind. However, incapacity planning is just as important, in some cases, more important, than death. A good estate plan identifies the people authorized to make important decisions on your behalf concerning finances, health care and other important issues. It also empowers them to do so with powers of attorney. Once you are unconscious or otherwise incapacitated, you can no longer legally assign someone else to act on your behalf. Preparing for others to make decisions for you should not be overlooked.

Neglecting funeral and burial wishes. If you were kind enough to purchase a burial plot and make funeral plans, don’t make your children have to conduct a scavenger hunt. Talk with them about it and tell them where they can find the deed to your plot and the contract with the funeral home. Name a point person who will be in charge of the funeral and burial arrangements and make sure they know your wishes. If you want to be cremated, make it clear to loved ones. The more information you share before your death, the more likely your wishes will be followed.

Not considering the tax implications of transferring property. Don’t leave your loved ones a huge tax bill. It may seem generous to gift property to heirs during your lifetime. However, in many instances, giving when you have passed will create a far smaller tax burden. If your estate planning attorney also understands taxes, he or she can work with you to determine how to minimize taxes and maximize your gifts.

Name back-ups for key decision makers. The unthinkable happens. Spouses perish in the same accidents. If no secondary beneficiary has been named, who inherits the estate? Name additional and alternative beneficiaries in case of unfortunate occurrences. You should name a backup executor, financial power of attorney and health care agent. If a person named in your estate documents cannot fulfill their role because of death, incapacity or other reason, the court will name substitutes.

Forgetting to clarify and update beneficiary designations. If your will says you want all of your children to get an equal share of your estate, but one child is on a joint investment account and another is on a Payable Upon Death checking account, you’ve created potential disputes. It’s important to list out the beneficiaries, their asset shares and create a directive to your bank to set the interests in your accounts upon your death. Your bank may require you to change how accounts are titled to achieve your goals. Therefore, you should take care of this while you are living, so you can make any needed changes.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “Top Five Estate Planning Mistakes” read also these additional articles: What Do You Need to Do When a Spouse Dies? and What If Estate Is Beneficiary of an IRA? and Will Making a Gift Conflict with Medicaid? and Does a Beneficiary have to Pay Taxes on 401(k)?

Reference: Kiplinger (Oct. 20, 2022) “5 Common Estate Planning Mistakes to Avoid”

People usually make gifts for three reasons—because they enjoy giving gifts, because they want to protect assets, or minimize tax liability. However, gifting in one’s elder years can have expensive and unintended consequences, as reported in the article “IRS standards for gifting differ from Medicaid” from The News-Enterprise.

The IRS gift tax becomes expensive, if gifts are large. However, each individual has a lifetime gift exemption and, as of this writing, it is $12.06 million, which is historically high. A married couple may make a gift of $24.12 million. Most people don’t get anywhere near these levels. Those who do are advised to do estate and tax planning to protect their assets.

The current lifetime gift tax exemption is scheduled to drop to $5.49 million per person after 2025, unless Congress extends the higher exemption, which seems unlikely.

The IRS also allows an annual exemption. For 2022, the annual exemption is $16,000 per person. Anyone can gift up to $16,000 per person and to multiple people, without reducing their lifetime exemption.

People often confuse the IRS annual exclusion with Medicaid requirements for eligibility. IRS gift tax rules are totally different from Medicaid rules.

Medicaid does not offer an annual gift exclusion. Medicaid penalizes any gift made within 60 months before applying to Medicaid, unless there has been a specific exception.

For Medicaid purposes, gifts include outright gifts to individuals, selling property for less than fair market value, transferring assets to a trust, or giving away partial interests.

The Veterans Administration may also penalize gifts made within 36 months before applying for certain VA programs based on eligibility.

Gifting can have serious capital gains tax consequences. Gifts of real estate property to another person are given with the giver’s tax basis. When real property is inherited, the property is received with a new basis of fair market value.

For gifting high value assets, the difference in tax basis can lead to either a big tax bill or big tax savings. Let’s say someone paid $50,000 for land 40 years ago, and today the land is worth $650,000. The appreciation of the property is $600,000. If the property is gifted while the owner is alive, the recipient has a $50,000 tax basis. When the recipient sells the property, they will have to pay a capital gains tax based on the difference.  In other words, the recipient will have $600,000 of taxable capital gain income, something that could have easily been avoided with proper tax planning.

If the property was inherited, or held in a certain way to obtain the “step up” in tax basis, the tax would be either nothing or next to nothing.

You can have your cake and eat it too. A good estate, tax, and asset protection plan is available if you seek out a competent Board Certified Estate Planning and Administration Specialist and Board Certified Tax Law Specialsit.  Medicaid planning is complicated and requires the experience and knowledge of an elder law attorney. What worked for your neighbor may not work for you, as we don’t always know all the details of someone else’s situation.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “Will Making a Gift Conflict with Medicaid?” read also these additional articles: Does a Beneficiary have to Pay Taxes on 401(k)? and The Risks of Creating Your Own Estate Plan and Is A Medicaid Planner Right for Me? and Alert: Scam Targeting Medicare Recipients

Reference: The News-Enterprise (Aug. 6, 2022) “IRS standards for gifting differ from Medicaid”

There are many complicated rules for inheriting assets in the form of retirement plans, workplace plans and Individual Retirement Accounts (IRAs), says a recent article titled “How Much 401(k) Inheritance Taxes Will Really Cost You” from The Madison Leader-Gazette. Any assets passed from one person to another in the form of a 401(k) are taxable. You’ll want to be prepared.

How are Inherited 401(k)s Taxed?

The inheritance rule for 401(k) tax usually follows the same path as the rules used when making contributions or withdrawals to tax deferred retirement plans. When a person dies, their 401(k) becomes part of their taxable estate.

This means that any taxes due on earnings not paid during the person’s lifetime need to be paid.

Traditional 401(k) plans are funded with pre-tax dollars. This is great for the saver, who gets to defer paying taxes while they are working. When they retire, withdrawals are taxed at their ordinary income tax rate, which is typically lower than when they are working.

There is an exception with Roth 401(k)s, where contributions are made with after-tax dollars and qualified withdrawals are tax free.

How the IRS taxes an inherited 401(k) depends on three factors:

• The relationship between the account owner and the heir
• The age of the heir
• How old the account owner was at the time of death.

Who Pays Taxes on an inherited 401(k)?

The beneficiary who inherits the 401(k) is responsible for paying the tax. They are taxed at the heir’s ordinary income tax rate. This could push the heir into a higher tax bracket.

What Should I Do with an Inherited 401(k)?

If your spouse was the original owner, you may leave the money in the plan and take regular distributions, paying income tax on the withdrawals. You may also roll it over into your own 401(k) or to an IRA. This allows the money to continue to grow tax free, until withdrawals are taken.

Can I Avoid Taxes on an Inherited 401(k)?

The only way to avoid taxes on inherited 401(k) would be to disclaim the inheritance, at which point the 401(k) would be passed to the contingent beneficiary. If you don’t need the money, don’t want the tax headaches, or would rather see it go to another family member, this is an option. Most people pay the taxes.

Planning For Taxes When Creating an Estate Plan

Talk with your estate planning attorney about your taxable assets and how to manage the tax liabilities to your heirs. There are numerous tools to address these and related issues. your heirs will be grateful for your foresight and care.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “Does a Beneficiary have to Pay Taxes on 401(k)?” read also these additional articles: The Risks of Creating Your Own Estate Plan and Is A Medicaid Planner Right for Me? and Alert: Scam Targeting Medicare Recipients and CMS Issues Updated Guidance Intended to Improve Quality of Nursing Home Care

Reference: The Madison Leader Gazette (July 29, 2022) “How Much 401(k) Inheritance Taxes Will Really Cost You”

High-profile cases like the Bezos or the Gates should cause many people to consider how their business and marital assets are tied together. You need to have plans in place from the beginning. No one thinks their partnership will end. However, it’s necessary to have a plan in place, just in case.

The Dallas Business Journal’s recent article entitled “Does your business need a prenup?” explains that there are three typical outcomes when married couples working as business partners decide to end their relationship:

• One individual buys out the other partner’s shares and continues running the business;
• The partners sell the business and divide the proceeds; or
• The couple continues working as partners after the divorce.

Safeguards can be put in place on the first day of the relationship to protect your personal and business assets in the event of a divorce. A way to do this is through a prenuptial agreement, which states what will happen if a split happens. A pre-nup should:

• Establish the value of the business as of the date of marriage or the date the agreement is signed;
• Detail a course of action with the appreciation or depreciation of the business from the date of the marriage;
• Say how business value will be measured; and
• Specify the allocation of business interests to be awarded to each spouse in the event of a divorce.

In addition to a prenuptial agreement, any privately held company should have a shareholder agreement (or “operating agreement” for non-corporations). The shareholder agreement is one of the most important documents owners of a closely held business will ever sign, but unfortunately, many businesses don’t have it.  It can also help to protect assets against judgment creditors and predators.

It controls the transfer of ownership when certain events occur, like divorce and states the following:

• Which party will buy out the other’s shares of the company if a buyout occurs; or
• If either party has the right to sell, how the ownership interest will be valued and the terms and conditions concerning the acquisition.

Because there are some tax implications involved in a buyout, it’s best to bring in experienced estate planning attorney who understands federal income tax law (and possibly federal estate tax law) for this process. In addition, life events like divorce or changes in a business partnership are an appropriate time to update your will, estate plans and any necessary insurance policies.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “What Happens If Couple Divorce and Own Business?” read also these additional articles: Can Some Foods Help Prevent Alzheimer’s? and Wayward Senior Tracked by Bluetooth Technology and What is the First Sign of Dementia? and Who Is the Best Person for Executor?

Reference: Dallas Business Journal (Aug. 1, 2022) “Does your business need a prenup?”

There are countless horror stories about grandchildren in tears, as they watch family farmland auctioned off because their grandparents had to liquidate assets to satisfy the taxes.

Another tale is siblings who were once in business together and now don’t talk to each other after one felt slighted because they didn’t receive the family’s antique tractor.

Ag Web’s recent article entitled “Who Gets What? Take This Important Estate Planning Step” says that no matter where you are in the process, you can always take another step.

First, decide what you’re going to do with your assets. Each farmer operating today needs to be considering what happens, if he or she passes away tonight. Think about what would happen to your spouse or your children, and who will manage the operation.

The asset part is important because you can assign heirs to each or a plan to sell them. From a management perspective, farmers should then reflect on the wishes of your potential heirs.

Children who grew up on the farm will no longer have an interest in it. That’s because they’re successful in business in the city or they just don’t have an interest or the management ability to continue the operation.

Second, assets if your estate will owe federal estate taxes.  Right now, the federal estate tax exemption sits at $12.06 million per person.  That means a couple can bequeath or give $24.12 million without estate tax consequences.  However, on January 1, 2026, in just under 3.5 years, the federal estate tax exemption reverts to one-half of the amount today, that is $6.03 million (in 2022 dollars) per person or $12.06 million (inb 2022 dollars) for a couple.  The IRS has already provided guidance that any gifts to heirs made today will not be “clawed back” under any reduction of the exemption.  What is more, if you make a gift today, that gift removes future appreciation from the taxable amount.  This gifting strategy can be combined with other estate tax planning tools such as estate freeze techniques, discounting techniques, and can be dovetailed with other non-tax goals.

After a farmer takes an honest assessment, he or she can look at several options, such as renting out the farmland or enlisting the service of a farmland management company.  After all, your rental income from your land won’t be worth as much if your heirs have to sell much of it to pay for estate taxes!you have to sell

Just remember to work out that first decision: What happens to the farm if I’m dead?

Once you work with an experienced estate planning attorney to create this basic framework, make a habit of reviewing it regularly.

You should, at a minimum, review the plan every two to three years and make changes based on tax or circumstance changes.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “What’s the Most Important Step in Farm Succession?” read also these additional articles: Is ABLE Account the Same as Special Needs Trust? and Pay Attention to Income Tax when Creating Estate Plans and How Changes to Portability of the Estate Tax Exemption May Impact You and What Healthy Snack Is Best for My Long-Term Health?

Reference: Ag Web (August 1, 2022) “Who Gets What? Take This Important Estate Planning Step”

While estate taxes may only be of concern for mega-rich Americans now, in a relatively short time, the federal exemption rate is scheduled to drop precipitously. Estate planning underway now should include consideration of income tax issues, especially basis, according to a recent article titled “Be Mindful of Income Tax in Estate Planning, Particularly Basis” from National Law Journal.

Because of these upcoming changes, plans and trusts put into effect under current law may no longer efficiently work for income tax and tax basis issues.

Planning to avoid taxes has become less critical in recent years, when the federal estate tax exemption is $10 million per taxpayer indexed to inflation. However, the new tax laws have changed the focus from estate tax planning to coming tax planning and more specifically, to “basis” planning. Ignore this at your peril—or your heirs may inherit a tax disaster.

“Basis” is an oft-misunderstood concept used to determine the amount of taxable income resulting when an asset is sold. The amount of taxable income realized is equal to the difference between the value you received at the sale of the asset minus your basis in the asset.  For example, if you purchased property (or any investment such as stock or a collectible) for $20,000 in 1995, your “basis” is $20,000.  If the asset is worth $100,000 today, your “built-in gain” is $80,000 ($100,000 – $20,000), and that is the amount of income (capital gain) that you have.

There are three key rules for how basis is determined:

Purchased assets: the buyer’s original basis is the investment in the asset—the amount paid at the time of purchase. Here’s where the term “cost basis” comes from.

Gifts: The recipient’s basis in the gift property is generally equal to the donor’s basis in the property (called “carryover basis”).  The giver’s basis is viewed as carrying over to the recipient. This is where the term “carry over basis” comes from, when referring to the basis of an asset received by gift.

Inherited Assets:  The basis in inherited property is usually set to the fair market value of the asset on the date of the decedent’s death. Any gains or losses after this date are not realized. The heir could conceivably sell the asset immediately and not pay income taxes on the sale.  The adjustment to basis for inherited assets is usually called “stepped up basis.”  In other words, if you die with that property worth $100,000, your heirs will get the property with a new “stepped-up basis” of $100,000.  Accordingly, planning for this is very important, and failing to get the step-up can result in dire consequences for your heirs.  The federal long-term capital gains rate is 20% and the top Louisiana state income tax rate is 6%.  So gains are most often taxed at approximately 26%.  Therefore, the step-up for that example property alone is worth $20,800 (($100,000 – $20,000) X 26%).  In other words, failure to qualify for the step-up can cost your heirs $20,800 on that $100,000 asset.

Here is the takeaway: Having an estate planning attorney that is also a good tax attorney makes sense to make sure your estate qualifies for the step-up. Basis planning requires you to review each asset on its own, to consider the expected future appreciation of the asset and anticipated timeline for disposing the asset. There is no easy one-size-fits-all rule when it comes to basis planning.

Estate planning requires adjustments over time, especially in light of tax law changes. Many of the strategies and tools used long ago may or may not work in light of the current and near-future tax environment.  Speak with your estate planning / tax attorney, if your estate plan was created more than five years ago.   If you don’t have an estate planning attorney that understands federal tax law, make sure you also consult with a CPA.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “Pay Attention to Income Tax when Creating Estate Plans” read also these additional articles: How Changes to Portability of the Estate Tax Exemption May Impact You and What Healthy Snack Is Best for My Long-Term Health? and Who will Receive Naomi Judd’s Estate? and The Biggest Health Mistakes Seniors Make

Reference: National Law Review (July 22, 2022) “Be Mindful of Income Tax in Estate Planning, Particularly Basis”

On July 8, 2022, the Internal Revenue Service issued new guidance that allows a deceased person’s estate to elect “portability” of their unused gift and estate tax exemption for up to five years after their death. So, if your spouse passed away less than five years ago, you may be able to file an estate tax return to transfer their unused estate tax exclusion to yourself.  More about portabilty is discussed in this article entitled “The Portability of the Estate Tax Exemption” by The Balance

What Is Portability, and How Does One Get It?

Portability is a way of transferring the amount of the gift and estate tax exemption that a deceased spouse did not use to the surviving spouse. It is only available to married couples.

To get the benefit of portability, the executor of an estate must file a federal estate tax return. Previously, this return had to be filed within two years of a person’s date of death, assuming an estate tax return was not required sooner. Because so many estates kept missing this window, the IRS decided to extend it to five years.

Let’s say your spouse has passed away, and you are the executor of their estate. If the total value of your spouse’s assets in their estate is below the threshold for federal estate taxation, you may assume that no estate tax return needs to be filed. While this is technically correct, if you do not file an estate tax return, there is no way to transfer over your spouse’s unused estate tax exclusion for your benefit.

The federal gift and estate tax exclusion as of 2022 is $12.06 million per person ($24.12 million for married couples). A person can give away — either during their lifetime or at death — up to this amount, tax-free.

In the above example, if your spouse’s estate were worth $2 million, that would leave an unused exemption of $10.06 million, which you could add to your own $12.06 million exemption, should you ever need it. But you must file an estate tax return for your spouse and complete the section of Form 706 currently entitled “portability of deceased spousal unused exclusion.”

Now Is a Good Time to Consider If You Could Benefit From Portability

The current federal gift and estate tax exemption will be reduced by half in 2026. So, if you have a spouse who died in the past five years, you should consider as soon as possible whether electing portability makes sense.

To be eligible, the deceased spouse must have been a U.S. citizen or permanent resident on the date of their death, and the executor must not have been otherwise required to file an estate tax return based on the value of the total estate and any taxable gifts. If an estate tax return was filed within nine months after the spouse’s death or an extended filing deadline, the portability option may also not be available.

For families with some wealth, this option could result in hundreds of thousands of dollars or more in tax savings. Many families might not have an estate tax problem now, under the gift and estate tax exclusion of 2022. However, if the second spouse dies after 2026, that spouse’s estate could owe hefty taxes. Portability allows you to plan ahead to avoid this problem.

Large Estates Should Not Rely on Portability

Remember this: portability can often be a fix it” provision depending on your estate tax situation.  It is usually better to plan your estate with an “A-B” provision in a testamentary trust, allowing for a estamentary “exemption trust” with a testamentary “marital trust”.  This is because for high net worth individuals who risk going over exemption threshholds, a good plan adopted beforehand can remove all future appreciation as well as all future income on the exemption amount from future estate taxes.  In other words, the preferred estate tax planning approach is to remove $12.06 from the estate tax, as well as all future income and appreciation on that $12.06 million.  You can’t do this with portability unless some of the predeceasing spouse’s exemption is not utilized on that spouse’s estate tax  return.  For a predeceasing spouse whose estate is not large enough to soak up the entire exemption amount, however, portability is a must.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “How Changes to Portability of the Estate Tax Exemption May Impact You” read also these additional articles: What Healthy Snack Is Best for My Long-Term Health? and Who will Receive Naomi Judd’s Estate? and The Biggest Health Mistakes Seniors Make and Remember Medicare’s Important Deadlines and Medicaid Crisis Plans for Long Term Care Costs

Reference: The Portability of the Estate Tax Exemption

There are many benefits to a Roth IRA, according to a recent article from Financial Advisor titled “Be Ready to Answer Questions About Roth Conversions In This Down Market.” Investors don’t pay taxes on future withdrawals and there are no minimum required distributions (RMDs) as there are for traditional IRAs and 401(k)s. Having to take an RMD after 72 and older can bump taxpayers into the next tax bracket, causing unwanted tax liability during retirement. You can also pass a Roth IRA onto an heir, as long as you meet the requirements, with no taxes to your heirs.

Why Doesn’t Everyone Have A Roth IRA?

Roth IRAs were originally created to expand the number of workers who had access to IRAs, while minimizing the short-term impact on the federal budget. They went into effect in 1998 and are named for William Roth, a U.S. Senator from Delaware. There are eligibility limits on Roth IRAs. Modified Gross Income must be under $144,000 in tax year 2022, and if married and filing jointly, MAGI must be under $214,000.

Benefits of Converting from a Traditional IRA to a Roth IRA

The best candidates for a Roth conversion are people who can afford to pay taxes due when funds are moved from a traditional IRA to a Roth IRA. Some people wait until they retire, when their income tax levels drop and paying the upfront taxes becomes more palatable.

If you don’t foresee needing all assets to pay day-to-day expenses in retirement and you have at least a moderate size IRA and brokerage account, a Roth IRA could be a good move. The same is true for someone who is years away from having to take RMDs (Required Minimum Distributions) or hasn’t yet filed for Social Security benefits.

Diversification of Tax Benefits and Burdens

If you have large retirement balances, it is often a good idea to have some that are Roth and some traditional.  So you shouldn’t convert all of your retirment funds into Roth accounts.  Why?  Because in retirement, you will have the option to “fill up” lower tax brackets  (at least the 10% and 15% brackets) with the traditional taxable retirement assets, and with the remainder, take tax-free Roth distributions putting them in the higher brackets.  This makes for good tax planning in retirement.  Your tax advisor or CPA can discuss with you an optimization program, and you can plan to take the appropriate distributions out at the end of the tax year to get the best tax result.  The point is, it is usually not advisable for your to go overboard and convert all your IRAs and 401(k)s into Roths.  Only convert some depending on what your top marginal tax bracket is at the time of conversion compared to your top expected tax bracket in retirement.  Getting a tax professional to help you with a strategy is the best approach.  So in answering the question”Is Now a Good Time for a Roth Conversion?”, you shouldn’t convert all of them into Roths.

Who Shouldn’t Do a Roth Conversion?

Most people who are working shouldn’t do a Roth conversion. Instead, they should wait until they are in a lower tax bracket before taking funds from an IRA, 401(k), SEP or other tax deferred accounts. Investors with modest IRAs and brokerage accounts won’t benefit as much as a Roth account.

When possible, conversions should also be done in smaller amounts, staggered over the course of several years.

Roth conversions are an excellent tool for estate planning. Heirs of Roth IRAs aren’t taxed on withdrawals, while they are taxed on withdrawals from traditional IRAs and have only a ten-year window in which to empty traditional accounts.

Speak with your estate planning attorney before embarking on a Roth conversion to be sure it is the best move for you from a tax and estate planning perspective. Aligning a Roth conversion with your estate plan will yield the best results.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “Is Now a Good Time for a Roth Conversion?” read also these additional articles: What Does a Funeral Cost These Days? and Will Drinking Milk Prevent Dementia? and What are Mistakes to Avoid with Beneficiary Designations? and Are Testamentary Trusts a Good Idea?

Resource: Financial Advisor (July 6, 2022) “Be Ready to Answer Questions About Roth Conversions In This Down Market”