The 5 New Rules of Estate Planning

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Back to Blog shutterstock 284183585 The 5 New Rules of Estate Planning Suzanne Shier Northern Trust in Chicago federal estate tax Estate planning Estate Plan For years the federal estate tax has been a big concern for Estate Planning but today’s rules provide a new set of tax saving opportunities many people are not aware of. This story from The Wall Street Journal explains.
Many experts feel the new tax rules present opportunities that often contradict past advice. “The conventional wisdom has been turned on its head because of changes in both the income tax and the estate tax,” says Suzanne Shier, chief tax strategist at Northern Trust in Chicago.

The biggest thing the new tax rules did was free hundreds of thousands of Americans from worrying about federal estate tax. Think back to 2004 when people who passed away with assets worth more than $1.5 million were subject to estate tax at rates close to 50%. Now compare that to last year when Congress set the estate tax at 40% and raised the exemption to $5.34 million.

Because the federal estate tax now affects so few people, people should review their Estate Plans to look for more tax saving opportunities. Here are a few tips to keep in mind.

1. Tap the Right Assets

To meet cash needs, take out a loan rather than sell appreciated investments in taxable accounts, especially with interest rates low.

2. Reset Capital Gains

You can find substantial savings on capital gains by carefully choosing which assets to hold until death. Take advantage of a federal provision known as the “step-up,” which cancels the long-term capital-gains tax on assets you hold until death. The “step-up” automatically raises your asset’s “cost basis” to its full market value as of the date of death.

3. Rethink Your Trusts

The “step-up” provision also affects tax-saving trusts. In the past, spouses needed to have a trust in place so their estate got the full value of two federal estate-tax exemptions.

Now a surviving spouse can claim the unused portion of a partner’s exemption: so if a man dies and leaves $1 million to his children, his widow can claim his unused $4.34 million and add it to her own exemption, which would give her more than $9 million for use at her death. For a couple with a net worth of less than $5 million, financial planner Jon Robertson believe you should get rid of any existing trusts you may already have. “It will preserve the step-up, minimize administrative fees and keep things simpler.”

4. Reconsider Gifting

Take a hard look at the gifts you make to people before death. “There’s almost no reason to make gifts anymore unless someone needs help,” said financial planner Deena Katz. When you consider the top rate on long-term capital gains is 23.8%, compared with 15% a few years ago, the best course for people who won’t owe estate tax is to forgo the gift and wait for the “step-up.”

5. Beware of State Taxes

Nineteen states charge an estate tax or an inheritance tax on those receiving the assets, or both. While some states have exemptions as large as the Federal Governments, the tax break is much lower in other states. If you live in a state that has death taxes, the good news is there is a trend toward larger exemptions. States like New York, Minnesota, Tennessee, Illinois and Maryland have all raised theirs with further increases in the works for other states.

Read the story here.

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