In our previous blog, we looked at different inheritable assets and what you should look out for if you’ve been named a beneficiary. Now let’s look at what you should know about the taxes involved and how you can protect your loved ones.
Recent Tax Law Changes You Should Know About
The Secure Act of 2020 changed how retirement assets will be distributed to beneficiaries. In the past, there were multiple ways to distribute the assets from retirement accounts. Under the new law, unless you are the spouse, you have 10 years to distribute all the assets from the inherited IRA. This creates new planning opportunities.
Additionally, the estate exemption changes every 5-10 years depending on who is in office. As a reminder, any amount of wealth over the estate exemption is taxed at 40% to heirs. This can cause an enormous tax bill and one that must be planned around. Under current rules, the estate tax exemption is $11.7M per individual, or $23.4M for a married couple. However, only a few years ago, the estate tax exemption was $5.49M – $10.98M for a married couple. In fact, as of the time this article is being written, there is a new proposal for the estate tax exemption being put forward through the “American Families First Plan.”
How to Minimize the Burden for Your Loved Ones
Depending on the size and complexity of your estate, there are many ways to construct an estate plan to minimize tax and administrative headaches for your beneficiaries.
Roth conversions in retirement can be a great way to take pre-tax assets and turn them into tax-free assets for your heirs. That way, when they distribute the assets over a 10-year period it’s tax free to them, instead of being taxed at ordinary income tax brackets.
Having a will or trust can also be a great way to provide clarity on how assets are meant to be distributed and organized.
Finally, depending on the size of your estate, irrevocable trusts including irrevocable life insurance trusts (ILITs) can be a great way to pay for estate tax obligations without having to sell illiquid assets such as real estate or businesses to fund the estate tax payments. Charitable trusts can also be a great strategy to shift assets out of your estate and leave a legacy to causes you care about while still maintaining some level of control over the rest of your life.
Your Next Steps
Like most big life events, this is where it helps to talk with a professional for many reasons. Some of the big questions are:
- What needs to be done in order to receive the inheritance?
- What accounts need to be opened?
- What forms need to be filed?
Working with a professional can also help you understand what all this newfound money means for your financial plan.
- Can you retire?
- Can you travel more?
- What does it mean for the future generations of your family?
At a time when you might be dealing with grief and family dynamics, working with an impartial third party to help you answer these questions can make a big difference. Feel free to reach out to us for a 45-minute complimentary consultation at info@DenverPWM.com.
Denver Private Wealth Management is an independent fee-based financial planning practice with 80+ years of experience in the financial industry. DPWM customizes portfolios based on your financial goals and works closely with you, your tax advisors and estate attorneys to form a comprehensive view of your financial situation. For more information or to set up a free consultation, contact us at firstname.lastname@example.org.
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