Estate & Tax Planning
Date: March 15, 2021

Estate Planning Tips to Keep More of Your Money With Your Family (and not the IRS)

There is a common misconception that it is simply not possible to take proactive measures to ensure money is passed on to family as opposed to the government upon your passing. Though estate taxes in Colorado and elsewhere have the potential to change in the future, the little-known truth is those who are single and pass away in 2021 may be able to pass on upwards of $11.58 million of assets to heirs tax-free.  Estate taxes kick in when such an individual passes away and has more than $11.58 million of assets, or has made previous gifts that add up to this amount in their lifetime.  

However, this does not mean only those with abundant wealth should consider estate planning in Lakewood, Colorado.  Everyone should take note of the estate planning tips as detailed below to effectively pass assets to their heirs while minimizing tax liability.  


Consider Gifting Money While You are Still Living

If you gift money to loved ones and others while you are still alive, you won’t worry about whether your money will be distributed as desired.  The IRS permits individuals to gift upwards of $15,000 per person each year without having to pay gift tax.  Those who receive such a generous financial gift do not have to pay taxes on it.  

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Gifting while you are still alive also reduces the potential tax burden on your estate as the gifts ultimately lower your estate value.  In certain cases, it may not be prudent to gift assets that appreciate in value during your lifetime.  As an example, houses and stocks tend to ascend in value as time progresses.  The tax amount tied to such assets is adjusted at the time of the owner’s death and may receive a “step-up in basis”, meaning it might be better to transfer them after death as opposed to while living. In other circumstances, it may be beneficial to gift certain appreciating assets during your lifetime to lower the size of an estate in the future, excluding the growth of the asset within your estate. These planning techniques are not one size fits all, this is why it is advantageous to work with an estate planning professional here in Lakewood, CO.


Create a Will and Double-check Beneficiaries

The little-known truth is many people do not have a will.  In fact, the 2020 Estate Planning and Wills Study reports less than one-third of individuals have a will.  This means far too few people are taking steps to prepare through estate planning in Lakewood. Even if you do not have a significant number of assets, you need a will.  

However, some assets are not distributed in accordance with the language of wills.  Certain accounts such as life insurance policies and retirement accounts empower individuals to identify beneficiaries for specific assets.  If a beneficiary is not named, the account will end up in probate court, ultimately empowering a judge to determine how the funds are distributed.  So double-check your beneficiaries on such accounts to guarantee they are in accordance with your wishes.


Consider Setting up a Trust

If your estate is particularly large or if you are concerned your heirs will not spend your hard-earned money in a prudent manner, establishing a trust can help with these issues if set up correctly.  This is your opportunity to appoint a trustee who will distribute your assets in a manner you deem fit.  Trusts can be established in different ways yet those labeled as permanent or irrevocable typically provide the best tax benefits.  Money placed in an irrevocable trust no longer belongs to you.  Rather, this money belongs to the trust so that estate taxes are not applied to your estate.  Though a trustee controls the funds in such a trust, it is possible to add stipulations on how the funds are used.


Convert to Roth Accounts

If you have an IRA or a 401(k) account, there is a chance that your heirs will be stuck with a sizable tax bill.  Offspring who inherit an IRA also inherit liability for income tax applicable to those funds.  Regular income tax is paid on distributions from such conventional retirement accounts.  Such an account must be fully liquidated within a decade after the account holder passes away.  If the balance in the account is considerable, it will mandate large distributions in this period of time that are taxed at your heir’s income tax rate, potentially pushing them into a higher tax bracket.  You can sidestep this problem by converting such traditional retirement accounts to those of the Roth variety, setting the stage for tax-free distributions if the account has been established for five years or more.  However, the funds converted will appear as taxable income at tax time so it is in your interest to cap the conversion every year to avoid the elevated tax bracket.


Keep Retirement Account Distributions to a Minimum

The distribution of inherited retirement assets triggers taxes.  Specific rules are applicable when such distributions are made when the beneficiary is not a husband or wife.  If a spouse passes away, the surviving partner in marriage is typically permitted to take over the decedent’s IRA as his or her own.  Required minimum distributions commence at 72 years of age.  

Those who inherit a retirement account from a non-spouse can transfer the money to an inherited IRA..  Minimum distributions must be taken the year that the inheritance occurs or the year after, regardless of whether the recipient is younger than 72 years of age.  


Be Aware of the Alternate Valuation Date

The fair market value of property is the amount at which that property is valued at the time of death.  Thankfully, there is the potential to mitigate tax liability utilizing estate planning techniques with a professional in Lakewood, CO.  In particular, using the alternate valuation date is worth consideration.  Executors should be aware of this option as it has the potential to reduce the tax burden. The alternate valuation date is six months following the death of the owner.  

This alternate valuation is available if it reduces the estate’s gross amount as well as the estate tax liability, likely spurring a more sizable inheritance to beneficiaries.  Property sold or disposed of within this period of six months is valued at the amount it was sold for on the date of the sale.  However, if the estate does not qualify for estate taxes, the date of death is the valuation date.

Do you have questions about estate and tax planning? The CERTIFIED FINANCIAL PLANNER™ Professionals and Certified Estate Planners™ at The Normandy Group offer serious estate planning for today’s complex world.  By combining tax, financial, and financial planning strategies we can help you achieve your goals. Contact us today for a complimentary consultation.

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Derek Landis