Prepare for Tax Changes and Protect Your Legacy

By Robert BaltzellFOXBusiness

You’ve worked hard your entire life, lived within your means, planned, saved and sacrificed for your family. You’re proud of the legacy you’ll leave behind when you’ve breathed your last breath. However, it’s more important now than ever before to take specific, strategic steps to protect your valued legacy. The death tax is set to soar in 2013, and now is the time to act so that the gifts you leave behind stay secure and intact. The clock is ticking, and waiting can result in dire financial consequences. Let’s look at what is set to take place next year unless Congress acts, which at this late date is extremely unlikely.

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  • Estate Tax Soaring. The estate tax, commonly referred to as the “death tax,” is set to increase in 2013 in a number of ways. First, the exclusion amount—the amount of money or the value of a property or other inheritance that you can receive or give without paying any federal taxes—is dropping from $5.12 million to $1 million. After you hit the $1 million mark, the tax rate will jump from 35 percent in 2012 to 55 percent in 2013. This is particularly important for small business owners and landowners who want their properties to be passed along to their heirs. They must be aware of this upcoming change and plan accordingly. For example, they may choose to make a gift to a trust or an individual before December 31.

With farmland values on the rise, aging farmers should take special note of this issue. This tax change will affect a large number of people—114,600 estates in 2013 up from 8,600 in 2011, according to the Internal Revenue Service.

  • Portability Ending. Another factor is that “portability” will end in 2013. In the last two years, if one spouse died without using up his or her federal estate tax exemption, the unused portion could be transferred to the surviving spouse. This portability ends on January 1.
  • Taxation of IRAs at Death. If you’ve contributed money to an IRA, watched the account ebb and flow over the years, and kept it growing steadily, that money is likely a key component of your financial estate. However, if your heirs cash it out when you die, they’ll end up losing a considerable amount of money to taxes—up to 55 percent. Ouch! Your heirs need to know that they can keep the funds in the IRA and simply re-name the account so that it’s under their own names, keeping the money growing in a tax-deferred account. But you need to take a step now to help your heirs. Don’t name a trust as the beneficiary. A trust is not a person. If a trust is the beneficiary, the IRA will end up being cashed out—and taxed highly—or your heirs will have to spend thousands of dollars in an attempt to win a “private letter ruling” from the IRS. It’s best to keep your IRA out of a trust if at all possible.
  • Heirs Need to “Retitle” the IRA. There is a very specific way in which the IRA must be retitled in order for it to be valid. Paperwork must be in order and in the proper format. For example, the information must read, “John Smith, Deceased (date of death) IRA F/B/O (for benefit of) Jane Smith, Beneficiary.”
  • Pay Death Tax Once Only. If an estate is larger than the federal estate tax exemption ($1 million in 2013, $5.12 million in 2012) and the taxes have been paid on the entire estate, the IRA beneficiaries can get a tax deduction, no matter who paid the tax. Many heirs don’t realize that another heir may have paid the entire estate tax.
  • Contribute to Education and Health. There are other strategies you can take to reduce taxes and begin distributing some of your investments. For example, you could contribute to a 529 college savings plan. You can contribute up to five years of contributions at once, which allows you to disburse some of your estate, let those funds grow tax deferred, and as long as the funds are used for educational purposes as required, the distributions are not subject to federal income tax. (They will be subject to your estate tax if you pass away within five years.) If you pay tuition directly to a school, that money is not counted against your lifetime gift tax exemption. The same goes for medical bills that are paid directly to the medical provider.
  • Give to Charities. You are allowed to donate stocks or mutual funds directly to a qualified charity without paying any capital gains taxes.

As you can see, there are a number of strategies that allow you to give away some of your estate in a way that protects it from high tax rates. It’s a joy to me to help my clients implement strategies so that even after they pass away, their money continues to work for them, benefitting their favorite charities and loved ones.

How you pass along your money speaks to who you are. With the right education and tools, you can leave a legacy you’ll be proud of—even with the tax changes that loom in 2013.

My team at RLB Financial works closely with clients to educate them and provide the tools necessary so they can make the best decisions for them and their families. We take the uncertainty out of the equation, putting clients in control of their finances, their futures and their legacies.

Part of that education component is making sure that clients know about upcoming changes so they can plan accordingly. This moment, today, is a critical time, as major changes in the death tax are scheduled for 2013.

For more information, contact Robert at (417) 459-4145.