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Wine Talk May 19 - Taxes, Taxes & More Taxes

May 18 Wine Talk:  Taxes, Taxes, and More Taxes  

Featuring Guest Speaker, Tim Bellig, CLU®, CLTC® 

May 19, 2021 

A conversation about the potential new legislation that could impact your assets and retirement income


Tim walks us through the impact potential new tax legislation might have on your assets and retirement income, and some possible solutions. Our current income tax and estate tax rates and exemptions are some of the most favorable we’ve experienced in history.  This makes some people wonder, “Is this favorable tax environment going to continue?” Aspects of the potential new tax legislation that aren’t as favorable as in years past include: Elimination in the step up in cost basis at death, but creation of a new $1M exemption on capital gains at death ($2M per couple). Maximum capital gains tax rate would match the maximum income tax level, which looks like will be about 39%. 

The estate tax exemption may be lowered to around $3.5M per person.  If your estate tax is at 40%, and your capital gains rate is at 39%, that is effectively a 79% tax on portions of your estate. Taxing assets in an irrevocable trust at the death of the grantor. Remember, some things included in the taxable estate include your home and life insurance proceeds from policies you own.  The death benefit for insurance is tax free to your beneficiaries, but those proceeds can push your estate past the exemption and into an estate tax situation.  Currently you can use an irrevocable trust to exempt the proceeds from estate tax, this can change with the proposed new legislation. So, what are some solutions to mitigate potential tax liability?  Tim had come creative ideas: 

If you have a Traditional IRA that you don’t need, you have several options: Wait until death, beneficiaries liquidate your IRA and estate is taxed twice if you’re over the estate tax exemption. Your heirs can liquidate the IRA over 10 years and pay the income taxes along the way. You can convert to a Roth and pay the taxes in your lifetime. Use IRA dollars to leverage with life insurance. 

As an example of using the last option, let’s say you have a Traditional IRA of $5,000,000 at age 72 and you took $150,000 from the IRA to make annual life insurance payments in addition to using your RMDs to invest.  If you live to age 90, between the remaining IRA value, RMD investment value, and the insurance proceeds, your estate could come out over $3.5 million ahead.   

Key take away:  get with your planner to see if some types of trust may be in order.  Plans in place now will likely be grandfathered in the event of changes.  Remember, no plan is a government plan. 

If you have any questions about how this possible new tax legislation might impact your estate or retirement and what you can do about it, please email your questions to george@napawealth.com. 

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