Whether you’re planning to pass down your estate to loved ones or you’ve just inherited one yourself, you should consider these important steps presented by Laurence Hale, AAMS®, CRPS®.
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Whether you’re planning to pass down your estate to loved ones or you’ve just inherited one yourself, you should consider these important steps presented by Laurence Hale, AAMS®, CRPS®.
- Subscribe to the You and Your Money podcast
- Follow us on Facebook, Instagram, LinkedIn and YouTube
- See how we can help you create a tailored strategy to help you Plan Well, Invest Well and Live Well: whzwealth.com
Welcome to You and Your Money. Empowering you to reach your goals with tips to help you Plan Well, Invest Well and Live Well. Today's episode features Lawrence Hale, principal managing partner and chief Investment officer at Weiss, Hale and Zahansky Strategic Wealth Advisors. Now on to today's topic. If you've got any amount of wealth you want to pass on to others, but especially if it's a significant amount, what are the tax concerns to be aware of? Well, so first, let me say, if you're planning on how to pass down your estate to loved ones or you've just inherited part of or all of an estate yourself, the process can definitely feel overwhelming. And there's obviously a wide range of emotions involved and typically thinking about taxes is one of the last things you want to do in that situation. But failing to do this can result in the needless loss of a sizable chunk of the wealth that you or your loved one work hard to earn and preserve. So that's where creating a tax efficient strategy for the transfer of wealth becomes so important. It can be a complicated process, but the right tactics will be a bit different for each individual and family. So it's really encouraged that these decisions be made with the guidance of professionals. But at the high level, there are several common and important steps that you should consider. The first step is it's important to understand the tax obligations that you may have. There are two types of taxes to be aware of. First, the estate tax and the second the inheritance tax. The estate tax is applied to the estate assets or the value of the assets and paid by the estate before the assets are allowed to pass on to the beneficiaries. While the inheritance tax is applied to the assets after they've been inherited and they are paid by the inheritor. Can you shed some light on what people can expect if they're either the one leaving an estate or the one inheriting it? Sure! First, maybe let's talk about the estate tax. So individuals can leave, currently, up to $12.92 million to their heirs without paying any federal taxes as of this year. But if you're leaving more than that, the estate could hit a tax rate as high as 40%. Also, there's 13 states that levy state estate taxes as well, including Connecticut. And there threshold for when taxes go into effect can often be considerably lower. Thankfully, Connecticut over the last few years has been indexing theirs up to match the federal exemption, and that now matches the 12.92 million on the federal side. So the inheritance tax side, the good news is there's no inheritance tax in Connecticut, nor at the federal level. However, there are six states that currently employ a state inheritance tax, those being Nebraska, Iowa, Kentucky, Pennsylvania, New Jersey, and Maryland. But regardless of if you live in one of those states or not, if you've recently received an inheritance, it's a good idea to discuss all the tax implications the inheritance could have on your upcoming tax year and later down the road with your financial planner and tax adviser, CPA, as soon as possible. Now that we understand the two tax types that impact the transfer of wealth, Lawrence, what can be done to minimize those taxes? There's a lot that goes into making sure that you have the right financial planning strategy and that can help you impact the minimization of taxes on the estate side. So whatever the assets are in your estate, whether they're above or below that 12.92 million and whether they be in the form of real estate investment portfolios, insurance policies, retirement accounts, valuables or other property, you want to make a plan for how those will be managed after your passing as soon as possible. So the planning is really, really important for everybody. And one way to do that is to establish a trust. That's a legal document that's set in place to protect and control your assets after your death or in the event you become incapacitated. There's four main types of trusts revocable trust, irrevocable trusts, living trusts and wills. So how can those different types of trusts help to preserve wealth? Well, let's start with the transfer of wealth between couples. So a married couple. For some couples, establishing a revocable, or a trust that can be revoked, can help in minimizing estate tax burdens. So couples with a high accumulation of wealth and assets may want to work with a professional to create trust that helps shelter the remaining spouse from the estate tax burdens after passing to their loved one. Are there other measures that can help couples when transferring wealth from one to the other? There actually are. And married couples may also want to think about setting up an exemption transfer. If you're receiving an inheritance from your spouse, you could also receive any unused tax exemptions. So your spouse may elect to pass their exemptions to you on a filed estate tax return, which you both can prepare in advance as a way to avoid further tax implications, something you'd want to do with your attorney and accountant. Now, what about non-spouse beneficiaries like children or grandchildren or anybody else you might choose? Well, for non spouse beneficiaries, one of the most important considerations if you're passing an IRA or individual retirement account or other type of retirement account, them most beneficiaries of IRAs must take the full value of the account through distributions made over no more than a ten year span. So that can result in a large tax burden to the beneficiary, as if it substantially increases his or her income during those ten years. Because remember, when you take money out of retirement account, it's typically taxed. By placing the IRA funds in the trust of your beneficiary could potentially bypass that ten year rule creating more beneficial distributions to them. So if you're planning how to pass along your estate, it sounds like establishing a trust or multiple trusts is a very important tool to consider. So let's focus now on what to know if you are the one inheriting the wealth. So there's a couple of major things you want to consider if you're set to inherit wealth or if you already have. So one is to be aware that there are deductions you can take with respect to the amount of taxes on the assets. These are areas on form 706 from the IRS that allow for deductions, including things like funeral expenses, debt from the decedent, mortgages and leans, charitable gifts made during your lifetime and bequests to your surviving spouse. So you make end of life preparations for your loved one whom you may inherit. And as you manage the estate after their passing, you'll want to keep track of these expenses because they can be put towards deductions that will minimize taxes on the inheritance. So again, of course, taxes aren't the most important thing on your mind at the time like that. So that's why it's really important to plan ahead and work with a financial planner and an attorney who can assist you in that process. When the time comes. I can see the value in that. What's the other thing that inheritors should keep in mind? Well, unfortunately, the taxes you pay on property and money you've inherited doesn't necessarily end just with the inheritance tax. Another major thing to prepare for is capital gains taxes. So those are that's something we all deal with every year. Gifts from an estate such as a stock portfolio, vacation property, home, cars, jewelry, the list goes on, are also subject to capital gains taxes if you inherit them and then decide to sell them down the road. This tax isn't levied on the total value of the item, nor at the time of the inheritance. But it's just on the amount of the item that has appreciated since it was inherited and when it was sold. So for example, if you received a vacation property that was worth 500,000 when you inherited it, sold it three years later for $750,000, that would be tax on long term capital gains on the $250,000 of appreciation, the difference between the 500 and the 700. So, however, exploring the latest inheritance tax laws can help you avoid certain tax implications that could cause you to owe more money than you should. So you'll want to speak with an attorney and a financial planner before making the decision to sell anything you've inherited that has significant value. So my major takeaway is if you're leaving wealth, think about setting up trusts and an exemption transfer. If you're inheriting, remember to track certain expenses that can be deducted on your taxes and be prepared for capital gains taxes if you sell any valuable property that you inherited. And whichever side of the inheritance process you're on, like you just said, it's advisable to work with professionals. This is not a do it yourself project. I think that's absolutely right Wayne. So all the steps we talked about today are only effective if they're done correctly and strategically, and it is often a very complicated process. So it's highly recommended that you assemble a team of professionals you can trust that have your best interests at heart. And this team should include people like a fiduciary financial advisor, a CPA, an attorney and an insurance agent. And together they can help you understand, plan for and manage the implications of the transfers of wealth, which not only will likely help save you money, but also a lot less worry and stress, which is just as important as the taxes. That brings us to the end of this episode. As always, thanks for listening to You and Your Money and find even more episodes, videos and other resources at our web site, WHZWealth.com. Be sure to come back next week for more tips to help you live fearlessly and pursue your financial and life goals. Until then, live well. Weiss, Hale and Zahansky Strategic Wealth Advisors offer securities and advisory services through Commonwealth Financial Network member FINRA, SIPC, a registered investment advisor. Fixed insurance products and services offered through CES Insurance Agency. They practice at 697 Pomfret Street, Pomfret Center, Connecticut, 06259 and can be reached at 860-928-2341. Weiss, Hale and Zahansky Strategic Wealth Advisors do not provide legal or tax advice. The tenured financial services team strive to support clients in achieving their financial life goals. For more information regarding wealth management and customize financial planning with Weiss, Hale and Zahansky Strategic Wealth Advisors, please visit WWW.WHZWealth.com.