During the last presidential election, Mitt Romney was seen by some as “out of touch” with the middle class; after all, his net worth was said to be more than $260 million. How could someone that affluent understand the issues of the working class? Others, though, believed that was the very reason he should have been elected: he understands business and how to build wealth. Either way, there’s no President Romney, but what we are able to appreciate is the impressive estate planning efforts he’s made over the years. The first thing you may think is that the federal estate tax is going to bite hard when the time comes.
Those same trusts we encourage our clients to consider in creating their estate plan are the also the ones Romney and his family use. By moving some of his assets to an irrevocable trust, he’s able to protect his wealth from the tax man while also ensuring his heirs aren’t straddled with whopping tax bills. Still, there are some states that have their own estate taxes and two states that have both the estate tax and the inheritance tax (New Jersey and Massachusetts).
The numbers change every year, but for 2014, the total federal exemption is $5.34 million. This means unless your estate reaches that impressive amount, you don’t have to worry about this tax that has the potential of gobbling up to 35 percent. There’s one element that’s important to remember: there’s always the possibility that the federal exemption could be lowered – at one time, Congress was considering an exemption of just $1 million. That means if all of your assets – your retirement account, any inheritance you’ve received, investments, home, cars and life insurance – total $1 million, you could be facing your own tax hit. Again, though, it appears that debate’s been shelved for the time being.
It does serve as a reminder of how everyone should be thinking long term. It’s never too soon to begin estate planning and the sooner you start, the better prepared you’ll be when you’re ready to retire. Here are a few things to keep in mind:
Consider setting up trusts. Some trust types, specifically the irrevocable trusts, could reduce your collective estate taxes. In fact, you can title your property to the irrevocable trust and in most cases, it will be excluded from your estate while the tax bills are being calculated.
You might also want to consider lifetime gifting. The limits change every year, but for 2014, you can safely give away to as many heirs as you wish up to $14,000 each. Spouses are allowed to double it to $28,000 per gift.
Did you know your distinctions in your life instance policies can affect your estate taxes? If someone else owns your policy, you may be able to keep it away from your estate to prevent it from being taxed.
Designating the owner of your life insurance. The way you set up the ownership of your life insurance policy can make a difference with respect to estate taxes. For example, if someone other than you owns your policy, certain life insurance proceeds may remain outside of your estate upon your death.
If you’re one of the lucky ones who lives in a state that has no state estate tax, don’t get too comfortable just yet. If you own property in another state that does have an estate or inheritance (or both) tax, those taxes will have to be paid.
This is just a brief look at estate taxes, but if you’re concerned about your estate plan, we invite you to contact our offices for a free consultation to discuss your needs. Remember – it’s never too soon.
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