There has been a lot of talk about the new administration bringing changes to tax laws. And while we don’t know when they will happen or to what extent the laws will change, we do know that these changes are likely a matter of “when,” not “if.”
[Related: How 2021 Tax Law Changes May Affect Your Estate]
Do the Coming Changes to Tax Laws Have You Worried?
We’ve received lots of questions about how the coming tax changes will affect people’s retirement and estate plans. It’s understandable that the uncertainty has some people worried. If find yourself feeling stressed about what tax law changes may mean for your future, I encourage you not to do anything aggressive or drastic. Instead, try to live by these principles:
Don’t Overreact.
Avoid making any major changes to your retirement or estate plans that you can’t undo or may regret. There are reasonable steps you can take to navigate the changes to tax laws. It’s not time to pack your bags for Panama just yet.
Educate Yourself.
By reading this article, you are beginning to educate yourself. You need to understand the types of assets you have and how they will be taxed, both now and in the future. If you don’t enjoy thinking through these things, find a friend or family member who does and work with them to do some research.
Please feel free to reach out to our office as well, as we specialize in asset protection.
Think Long-Term.
Consider the long-term impact of actions that you take. Instead of focusing on immediate results, think about what will be important to you decades from now.
6 Action Steps You Can Take:
With these principles in mind, here are six steps to consider as we all prepare for coming tax changes:
1. Max out Roth IRA contribution.
I am not a financial advisor, so this is not financial advice. But from an estate planning perspective, I can tell you that traditional Roth IRAs are a great way to minimize taxes because they grow tax-free. You pay the taxes on these funds when they enter the Roth IRA, and then they are exempt from future income and capital gains taxes. Estate taxes may still apply, but you will be saving in other types of taxes.
2. Create an aging and estate plan that minimizes taxes.
This step is crucial. If you hope to minimize taxes, you must have a proper aging and estate plan that is relevant to your goals and assets.
This cannot be accomplished through generic online forms.
You need to create a personalized plan with a professional who specializes in estate and elder law. Sadly, I have seen template forms and generic plans cost people thousands upon thousands of dollars in taxes over the years.
3. Allocate assets according to their tax treatment.
This sounds complicated, but it isn’t. It simply entails taking your assets that will incur a lot of taxes and putting them in places where taxes are either minimized or not applicable. For example, an asset that incurs a lot of income tax, such as an active stock account, could be placed into a Roth IRA, where income taxes will not apply to it.
4. If you want to give to charity, consider planned giving.
If you are planning to give to charity, either now or when you pass, there are some strategies you can use that allow you to give more and reduce taxes.
The first is that you can make decisions that give you an immediate tax deduction for gifts in the future.
The second is to set up plans that allow you to give away items that would be subject to a substantial tax if you kept them. If the charity is a non-profit organization, they won’t owe taxes on the items that you give them.
5. If you need life insurance, use an irrevocable life insurance trust (ILIT).
If you need life insurance, you can set up an irrevocable trust to own the life insurance policy. If it is set up properly, the trust will pay out the money to whomever you designate when you pass, and the proceeds won’t be subject to the estate tax.
6. If you have unneeded assets, use annual giving.
If you have built enough wealth that you know you won’t spend it all, you can make annual gifts to family and friends without any tax consequences. While annual giving amounts are relatively small ($15,000 per year), if you do this year after year, it can add up to a large sum that you can pass on, tax-free.
As mentioned previously, regardless of what is to come, I am confident there are ways to navigate these changes and minimize the effects of the coming changes to tax laws. If you have questions about your situation, schedule an appointment with us today.
