Tax Strategies for the Rest of Us
President Trump’s new estate- and gift-tax rollback probably sounds like great news to anyone worried about passing down an inheritance to their families. And if you happen to be super-wealthy, it definitely is. But for the rest of us—for simplicity’s sake, call us the 99 percent—the recent changes to the estate and gift tax serve only as a meaningless distraction keeping us from doing what most of us have long been avoiding: estate planning.
Most people are all too happy to put off planning their estates. They don’t like thinking about dying, so they avoid setting up a plan for the future even though it’s the smart thing to do.
Create an Estate Plan
Under the new tax plan, individuals can give away up to $11.2 million free of estate and gift tax, and couples can combine that to give away up to $22.4 million. But even before this law, the vast majority of Americans didn’t have to pay the estate or gift tax. Now, even fewer folks do. But the new tax law certainly doesn’t mean people don’t need to create estate plans anymore.
Unless Congress can make us all immortal, people still need to plan! In fact, estate- and gift-tax rollback is a great opportunity to change the conversation altogether. Now we can talk about what really matters.
These taxes have nothing to do with most of the reasons that people need to create their estate plans. These reasons aren’t about taxes. They have everything to do with avoiding probate, managing money for children, leaving gifts to charities, and taking care of your surviving partner or spouse.
Most estate planning books, and many estate planning attorneys, focus on reducing taxes.
Honestly, I think this happens because most lawyers feel more comfortable talking to clients about technical issues than the human ones that actually drive estate planning for almost everyone. And that’s such a missed opportunity. People make a plan to take care of the people they love the most. They pick up the phone and make an appointment, or pick up an estate planning book, because somewhere, deep down, they know that they won’t live forever and that they should put a plan in place. Taxes matter, but they are hardly ever what motivates people to get started.
In my new book Every Californian’s Guide to Estate Planning: Wills, Trusts, and Everything Else, I write about the estate planning issues that most Californians do need to think about. The book also includes access to essential worksheets that help you get started on writing a will, preparing a trust, naming beneficiaries, and much, much more.
Here are a few issues you should keep in mind as you begin planning your estate:
Managing money for minor children. Children under the age of 18 can’t own property worth more than $5,000. So, if you are going to leave them an inheritance, you need to make sure that there’s an adult in charge until they are at least 18—usually longer than that. Simple custodial accounts, or a will or a living trust that names an adult to manage money until a child is at least 25 years old, makes sense.
Taking care of a surviving partner or spouse. If you are in a relationship with someone, putting an estate plan in place to guarantee their comfort and security is key. To do this, families often use wills or trusts, as well as life insurance and retirement assets, to help surviving spouses and partners remain in their homes and take care of their needs.
Planning in a blended family. Many Californians live in non-traditional families, where partners bring children from previous relationships. Balancing a partner’s needs with those of children who may differ dramatically in age makes estate planning important.
Finding smart ways to give to charities. If you want to give to charity, using pre-tax dollars can go a long way toward making your gifts efficient.
Making sure your beneficiary forms are up to date. It is a fact of life that many Californians will work at several jobs during their working lives. Making sure that your old 401(k)s are rolled over into IRAs when you leave a job and that your beneficiary designations are up to date will make it easier for your loved ones when you die.
Avoiding probate. Many states have made their probate process relatively inexpensive and quick. But not California. Creating a living trust will save your loved ones both money and time by keeping the probate court out of the estate settlement process.
There still are tax issues that do affect most Californians—they’re just not estate- and gift-tax issues. Here are three taxes that all Californians should consider.
Three Tax Issues That Californians Need to Plan For
Property Taxes: In California, property tax rates are set by the purchase price of your home. After that, they can rise only a small amount each year. When a new owner purchases that home, their property tax rates are then based on that new purchase price. So, the longer you stay in your home, the lower your property tax rates will stay. If you give your property to your children when you die, they will inherit your low property tax rate because there’s an exception to the rule that new owners get reassessed for transfers between parents and children.
Capital Gains Taxes: In California, where property values often go up, people who sell their homes are faced with a steep tax on their capital gains: the difference between what they bought that house for and what they sold that house for later. If you don’t sell your home, but instead leave it to your loved ones at death with a smart estate plan, they can inherit it at the value that house had at your death—all the capital gains are erased by what’s called a “step-up” in value.
Income Taxes on Retirement Accounts: If you leave an IRA or a 401(k) to someone at your death, they will have to pay income taxes on those assets when they withdraw them. But if you leave retirement assets to charities, they will not have to pay such income taxes—which means your retirement dollars are the best ones to leave to the organizations you want to support.
Congress gave the wealthy an estate-tax break. But the new law has almost no impact on most Californians, who still have every reason to plan for the future. Given the benefit of making a smart estate plan, be sure you don’t confuse a tax break for a timeout. What are you waiting for? Start planning today.
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