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Tax Planning Strategies

Tax and Estate Planning Tips Post-SECURE Act

Tax and Estate Planning Tips

These tax and estate planning tips can help you efficiently transfer your money to the next generation despite the SECURE Act’s elimination of the stretch IRA.

In December 2019, the Setting Every Community Up for Retirement Enhance­ment (SECURE) Act was signed into law by then-President Trump. In addition to a variety of retirement-related provisions, the SECURE Act included changes that may impact the estate plans of wealthy Americans.

Today, SECURE Act 2.0 is making headway in Congress. Meanwhile, many anticipate changes to the tax code as President Biden proposes tax hikes for the wealthy. Plus, many of the provisions included in the Tax Cut and Jobs Act are set to expire in 2025.

As these events unfold, now may be a good time to review your estate plan and look for possible tax planning opportunities.

Eliminating the “Stretch IRA”

The SECURE Act of 2019 made several notable changes to American retirement plans. Yet the elimination of the “stretch IRA” stands to meaningfully impact the estate plans of many affluent Americans.

Prior to 2020, a beneficiary who inherited a traditional IRA could stretch their required minimum distributions (RMDs) over their lifetime. Now, the SECURE Act gives non-spousal beneficiaries (with certain exceptions) a 10-year window to draw down the entire account balance. This can result in significant tax consequences for inheritors of large IRAs—especially those in the highest tax brackets.

The removal of the stretch provision eliminated a valuable estate planning strategy for many families. But there are other strategies you may want to consider building into your estate plan to minimize your heirs’ potential tax burden and preserve more of their inheritance.

Roth Conversions

The IRS allows individuals—regardless of income—to convert a traditional IRA to a Roth IRA. With a Roth conversion, you pay taxes on the amount you convert in a given tax year at your ordinary income tax rate. You can then make withdrawals tax-free if you’re over age 59 ½ and satisfy the five-year rule.

Since Roth IRAs don’t have RMDs, you can let your funds grow tax-free until you need them or transfer them to a beneficiary. However, inherited Roth IRAs do have RMDs.

Therefore, you may want to consider a second step to ease your beneficiaries’ potential tax burden—for example, creating a trust for the benefit of your heirs and naming it as the beneficiary of your Roth IRA. Just keep in mind that with some of these strategies, you may end up bearing the tax consequences instead.

Charitable Remainder Unitrusts

Another alternative to the stretch IRA is to use a charitable remainder unitrust (CRUT). Unlike a charitable remainder trust, a CRUT allows the owner to make additional contributions after the first year. Additionally, the CRUT beneficiary isn’t required to make withdrawals.

You can fund a CRUT all at once with your entire IRA distribution or over several years. While the IRA distribution is taxable, you can offset the tax consequences with the tax deduction you get from funding the trust.

The trust then pays income to your beneficiaries over a maximum period of 20 years, and these payouts are taxable. However, stretching them out over many years can make the annual tax liability more manageable. At the end of the period, any remaining trust balance transfers to a qualifying charity of your choice.

As an additional step, you can buy a life insurance policy within the CRUT once you fund it. The conversion is tax-free, as are distributions to the trusts’ beneficiaries.

Consult an Estate Planning Attorney and Wealth Manager for More Tax and Estate Planning Tips

The SECURE Act of 2019 may indeed warrant a review of your estate plan. Yet major changes may not be necessary depending on your goals.

In addition, the strategies mentioned above aren’t exhaustive and may not be appropriate for you and your family. There may be alternative strategies that make more sense. Be sure to consult an estate planning attorney and wealth manager to ensure your estate plan is aligned with your objectives.

Sherwood Wealth Management works with affluent individuals and families in the Roaring Fork Valley with a specialty in inherited wealth. If you’re looking for a fiduciary financial advisor to help you plan your legacy, please schedule a call.

Funding Education Expenses for the Next Generation: 4 Tax-Efficient Strategies

Funding Education Expenses

As the cost of college tuition continues to rise, many people are looking for ways to reduce these expenses. And if you’ve accumulated significant savings, you may be seeking tax-efficient ways to transfer your wealth to the next generation. Funding education expenses for your younger family members can be a great way to achieve both objectives. 

Taxes on Gifts

Unfortunately, gifting large sums of money to family members often comes at a cost. Currently, you can gift up to $16,000 annually ($32,000 per couple) per beneficiary without triggering the federal gift tax. The IRS also imposes a generation-skipping transfer tax (GST tax). This tax discourages people from deliberately skipping the next generation in their estate plan in favor of younger generations.

Indeed, these taxes can be a headwind for assisting younger family members financially. Fortunately, there are strategies you can use to transfer wealth without incurring a hefty tax bill—especially if your younger family members seek higher education. 

Consider these four tax-efficient strategies to fund education expenses:

Strategy #1: Fund Education Expenses Directly

One of the simplest ways to fund your family’s education expenses is to pay the educational institution directly. First, you’ll avoid gift and GST taxes. In addition, the amount won’t count towards your annual exclusion or lifetime exemption. 

Notably, this strategy doesn’t limit you to funding college-related expenses. You can pay for any level of education for your family members tax-free, so long as you write the check directly to the institution. 

Strategy #2: “Superfund” a 529 Plan

A 529 plan is an investment account that offers certain tax advantages if the funds go towards qualifying education expenses. Currently, you can contribute up to the annual exclusion amount each year without incurring the gift tax. 

In addition, many people don’t realize that you can contribute up to five years of gifts at once, per beneficiary. Meaning, in 2022 you can contribute up to $80,000 ($160,000 per couple) to a 529 plan at one time. That money can then grow tax-free until the beneficiary is ready to withdraw it.

It’s important to note that the tax treatment of 529 plans varies by state. To avoid unintended tax consequences, be sure to speak with your financial advisor before using this strategy. 

Strategy #3: Make Annual Tax-Free Gifts

If you can’t “superfund” a 529 plan, you can make annual contributions up to the annual gift exclusion limit tax-free. Alternatively, you can fund a Uniform Transfer to Minors Act (UTMA) account, an IRC Section 2503(c) Trust, or a Crummey Trust.

These accounts have similar benefits to a 529 plan but allow you to maintain more control over your gifted assets. However, these strategies can also be more complicated. It’s typically a good idea to consult a trusted advisor to determine what type of account makes most sense for you and your family.

Strategy #4: Lend Your Family Members Money

You may want to support younger family members financially without gifting them money outright. Instead, you can lend them money to pay for their education expenses.

Each month, the IRS releases Applicable Federal Rates, which represent minimum interest rates for family loans to avoid tax complications. These interest rates vary depending on the term of the loan. However, they’re typically more favorable than federal or private student loan rates. 

Funding the Next Generation’s Education Expenses

If you’ve been fortunate enough to accumulate significant wealth during your lifetime, you may be thinking about ways to pay it forward to the next generation. Since the IRS makes it difficult to transfer wealth completely tax-free, careful tax and financial planning can be beneficial. 

If you’d like to speak with a fiduciary wealth advisor about incorporating some of these strategies into your financial plan, please give us a call. We’d be happy to help. 

3 Ways to Make a Greater Impact with Your Wealth

3 Ways to Make a Greater Impact with Your Wealth

If you’re the beneficiary of a windfall, a prudent first step is to develop a financial plan to ensure you can meet your day-to-day financial obligations and long-term goals. However, affluent individuals and families often have more altruistic goals for their wealth, as well. Fortunately, there are many ways you can effect change by strategically directing your money to organizations and businesses that share your values. Whether your objective is to change the world, shape your legacy, or simply lower your tax bill, here are three ways to make a greater impact with your wealth.

#1: Support Local Businesses

Shopping local is a great way to strengthen your community by boosting the local economy and providing jobs for residents. In fact, for every $100 spent at small businesses, $48 is put back into the local economy, according to data from Intuit Mint. Furthermore, the Small Business Administration reports that small companies create 1.5 million jobs annually and account for 64% of new jobs created in the United States.

In addition, shopping local can help reduce reliance on larger chains with less commitment to their communities. These larger corporations may also have less responsible business practices than the businesses in your community. If you want to make a greater impact with your wealth, supporting local businesses is a great place to start.

#2: Give Strategically

Americans tend to be very charitable. Indeed, charitable giving accounted for 2.3% of gross domestic product in 2020, according to National Philanthropic Trust. Moreover, 86% of affluent households maintained or increased their giving in 2020 despite uncertainty about further spread of COVID-19.

Despite our charitable tendencies, most of us fail to measure the impact of our gift after writing the check. Fortunately, you can make a greater impact with your wealth by giving more strategically.

For example, donor-advised funds (DAFs) are an effective and easy way to financially support the causes most important to you. DAFs have exploded in popularity in recent years. In 2020, assets totaled $142 billion, according to the 2020 Donor-Advised Fund Report. DAFs are set up within a charitable organization such as a community foundation. Among other benefits, they offer increased flexibility and efficiency over many other charitable giving methods.

#3: Invest with a Purpose

Environmental, social, and governance (ESG) investing is becoming increasingly mainstream among investors who want to do well by doing good. According to research from Bloomberg, global ESG assets are on track to exceed $53 trillion by 2025, representing more than a third of the $140.5 trillion in projected total assets under management. 

There are many ways to invest with a purpose. Impact investing, socially responsible investing, and green investing are just a few examples. These strategies allow investors to support companies with responsible business practices while earning a positive return.  If you wish to make a greater impact with your wealth, aligning your investment dollars with your values can help you achieve this goal without sacrificing financial gain.

A Trusted Advisor Can Help You Make a Greater Impact with Your Wealth

Wealth can help you achieve many goals, from providing financially for loved ones to effecting meaningful societal change. If you would like to make a greater impact with your wealth, a trusted financial advisor can help you develop a plan to ensure your efforts are effective.

Sherwood Wealth Management specializes in the unique financial planning needs and objectives of sudden wealth beneficiaries. If we can help you develop a plan for your newfound wealth, please do not hesitate to schedule a call. We’d love to hear from you.   

4 Estate Planning Strategies to Minimize Taxes on Transferred Wealth

Estate Planning Strategies to Minimize Taxes on Transferred Wealth

Wealthy families may benefit from certain estate planning strategies to minimize taxes on transferred wealth. These strategies may include life insurance, Roth IRA conversions, lifetime gifting, and others.

The Great Wealth Transfer is underway. Over the next 25 years, nearly 45 million U.S. households will transfer approximately $68 trillion to the next generation, according to Cerulli Associates. In addition, many provisions of the Tax Cut and Jobs Act of 2017 will sunset in 2025. This raises questions about future tax rates—especially on the wealthiest Americans.

Indeed, tax laws are always in flux. However, it’s safe to assume that Uncle Sam will want his share, no matter when you transfer your estate. If you expect to leave significant wealth to your heirs, proper estate planning is key. Fortunately, there are strategies you can leverage to minimize your family’s potential tax burden.  

to minimize taxes on transferred wealth, consider the following estate planning strategies:

Strategy #1: Life Insurance

Depending on its size, your estate may owe federal and possibly even state taxes when it transfers to your heirs. Many wealthy families purchase life insurance policies to cover the potential tax liability and preserve the next generation’s inheritance.

Your beneficiaries can also use the payout to fund the expenses they incur settling your estate. A cash reserve can be helpful if most of your wealth is in illiquid assets like property and other valuables.

Strategy #2: Roth IRA Conversion

The SECURE Act of 2019 abolished the “stretch IRA” for most individual retirement account (IRA) beneficiaries. Previously, beneficiaries could stretch withdrawals over their lifetime to minimize their tax burden. Now, IRA beneficiaries must empty the IRA within 10 years of inheriting it.

This is especially problematic for traditional IRA beneficiaries, since withdrawals are taxed as ordinary income. If your heirs are high earners, the tax consequences can be significant. Not to mention, the required withdrawals can place them in an even higher tax bracket.

If you anticipate transferring a sizable account balance, a Roth IRA conversion may be an effective workaround. Roth IRA withdrawals are tax-free if the account has been open for at least five years. Meaning, your beneficiaries can keep the entire balance if transferred in a Roth.

Of course, a Roth IRA conversion doesn’t allow you to avoid paying taxes altogether. Instead, it’s a taxable event for you, the account owner. Therefore, it’s important to work with a financial planner to determine if a Roth conversion makes sense.

Strategy #3: Lifetime Gifting

In many cases, gifting is one of the simplest estate planning strategies to reduce taxes on transferred wealth. Each year, the annual gift-tax exclusion allows you to gift a certain amount (up to $15,000 in 2021) to as many people as you like without incurring the federal gift tax. Moreover, spouses can combine the annual exclusion to double the amount they can gift tax-free.  

Cash gifts are most common. However, you can also use the annual exclusion to transfer personal property or contribute to a 529 college savings plan. Alternatively, the IRS allows you to pay educational and medical expenses on behalf of someone else without incurring federal taxes. The only caveat is you must pay the institution directly.   

Strategy #4: Trusts

Trusts can be effective estate planning strategies to reduce taxes on transferred wealth. For example, a grantor retained annuity trust can be helpful if you’re transferring assets that are hard to value. In addition, lifetime credit shelter trusts allow you to maximize your annual gift-tax exclusion without immediately transferring your wealth.

Trusts are varied and complex. It’s important to consult your financial planner or estate planning attorney to determine if they fit within your estate plan.

Next Steps: Review these Estate Planning strategies With a Trusted Advisor

Your estate plan is a living document, meaning it will evolve as your family dynamics and financial situation change. Be sure to review it often to ensure it remains aligned with your wishes and identify additional strategies to reduce taxes on transferred wealth.

Sherwood Wealth Management specializes in the wealth management needs of sudden wealth beneficiaries. If you’ve recently inherited a windfall, we can help you develop a plan to protect and grow your newfound wealth and preserve it for future generations. To learn more, please schedule a call with our founder, Brian Littlejohn, CFP®, CFA®.