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  • By: Higher Ground Legal
  • Published: March 26, 2024
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Across America, millions of the recently deceased would be rolling in their graves if they knew how much of the wealth they left behind to their loved ones among the next generation gets siphoned away into taxes. This article explains:

  • The risks taxes present to your estate and your loved ones in Maryland.
  • The concept of tax minimization and how it applies to estate planning.
  • How to minimize tax losses with several tax minimization strategies.

Why Will Taxes Impact My Loved Ones After I Am Gone?

It can come as a nasty and annoying surprise to learn that while you have been paying taxes on all your money and wealth throughout your life, your loved ones and your kids will be paying taxes again on the very same money.

But just because it is frustrating does not mean it cannot be handled with careful planning.

What Taxes Will Affect The Wealth I Leave Behind For My Children?

There are two types of taxes that will impact your estate and its beneficiaries when you die: estate tax and income tax.

Your children or other beneficiaries will pay estate taxes on the value by which your estate exceeds the current exclusion threshold, which changes from year to year. In the past, it has been as low as $1 million. In 2024, it is $13 million, but in a couple of years, the estate tax exclusion is going to go down to about $6 million.

If you have more than the current estate tax threshold at the time of your death, then your kids could pay up to a 40% tax on that extra money. In addition, they will then also have to pay income tax on any Individual Retirement Arrangement (IRA) money you leave them.  They paid estate tax on it, and then they have to pay income tax on it again.

This means that right now, in today’s tax environment, the worst possible thing that you can leave your children is an IRA.

What Assets Are Better To Pass On From A Tax Perspective?

While retirement accounts are particularly problematic in terms of taxes at the moment to pass on, other assets offer more advantages. For example:

  • Real estate can be a strong choice because there is no capital gains tax on that.
  • Stocks and bonds will also avoid the capital gains tax.
  • Roth 401k IRAs are great to leave to your kids because they avoid the doubled tax problem by not having any income tax on them.
  • Life insurance is always great to leave to your children because it is exempt from income tax.

At the moment, Roth IRAs and life insurance policies are the most smooth, efficient, and tax-free ways to transfer wealth. But you will still have to handle the estate tax depending on the size of your overall estate.

How Will My Children’s Tax Bracket Affect The Taxation Of What I Leave Behind For Them?

One thing that a lot of people have not considered is that their children are likely to be in a higher tax bracket than they are when they die. If you die in your late eighties and your kids are now in their fifties and sixties, these are likely to be the highest earning years in their life, so that means they are likely to be in a higher tax bracket than you, especially when you consider that taxes are likely to go up over time.

Since your kids will be in some of the highest brackets they have ever had when they inherit money from you, if they get a big chunk from, for example, an IRA, that could push them up into the highest tax bracket, costing them more not just on what you leave behind, but also from what they are earning.

By paying taxes now, you are probably saving your kids a lot more money in the future than it will cost you now.

What Is Estate Tax Minimizing?

To minimize estate taxes, you want to have the value of your full estate fall under the current exclusion. There are only two years left with the rather high $13 million per person exclusion threshold.

If you give away some money now during these remaining two years, you can avoid estate taxes in the future, even if the limits change.

In addition, creating assets that exist outside of your estate entirely using Irrevocable Trusts, such as an Irrevocable Life Insurance Trust (or ILIT) can also help minimize estate taxes.

My Estate Is Currently Worth Less Than $6 Million. Do I Still Need Tax Minimization?

Even if you do not have five or six million dollars or more worth of assets, you should still be strongly considering adopting some tax minimization strategies. If you are even remotely close to the threshold, and you live another 10 to 20 years, your assets will probably grow to the point where your kids may end up owing estate taxes.

Even if you are not close to that limit, you may incorrectly assume that taxes are not a consideration. But just because the estate tax does not apply to you does not mean income taxes do not present a real danger of heavy losses, which should be taken care of.

If you have IRAs, a Thrift Saving Plan (TSP), or a 401K, your children are going to pay a lot of income tax when you die, so you want to tackle that as much as possible while you are still alive. One of the best ways to minimize that at the moment, for example, is by doing Roth conversions. Converting your current IRAs to Roth 401ks over time.

An estate planning attorney with extensive tax and retirement planning experience can help you determine the optimal amount to convert each year so you do not pay too much in taxes.

Will Tax Planning Or Minimization Benefit Me During My Lifetime?

There are some benefits you can accrue during your lifetime with careful tax planning. After all, you can also end up paying less in taxes during your lifetime by doing Roth conversions. But the primary benefits are for your children or other beneficiaries.

For most aging Marylanders, however, the security and financial future of their children is, if possible, an even greater and more important consideration than their own. This is where tax-minimizing strategies really pay off.

What Are Some Common Tax Minimizing Estate Planning Strategies Available In Maryland?

Avoiding estate and income taxes and their financial burden on your beneficiaries requires a fair amount of thinking ahead and careful planning to implement one or more of the following strategies.

Option 1: Giving It To Your Children Now (Directly Or Indirectly)

One option that is certainly available to everyone is to just give your money away. This can be done by passing it on directly to your kids or giving it to them indirectly or over time through an irrevocable trust.

In the next two years, there is also something you can do, called a lifetime gift. A lot of people are under the impression that you can only give up to a certain amount, $17,000 a year, for example, to each beneficiary if you do not want to pay the estate taxes or the gift taxes.

While that is technically true, it really only applies to reporting requirements. Right now the limits are so high, you still don’t pay any gift taxes unless you have given away more than $13 million over your lifetime. If you give away $17,000, you do not even have to report it.

But if you give away a hundred thousand or half a million or a million dollars, you still won’t pay any tax on it, but you do need to report to the IRS that you have used part of your lifetime gift exclusion. Then that will come off your estate exclusion when you die, but there is no tax that you or your kids pay now to do that.

As a result, many wealthy clients are putting large amounts of money into irrevocable trusts now because they know they are going to be over that limit soon.

Option 2: Give It Away To Charity

If you have any charitable causes you wish to support, you can also give away as much money as you want directly to charity, and there’s no tax burden on that. You can even avoid income tax that way.

If you wish to do so, however, it is important to figure out which assets are best for giving to charity, which is not always as simple to do as Marylanders expect it to be.

For example, imagine someone with three children who wants to give 25% of their assets to each child and the fourth share to a charity.

If they have some IRAs, some real estate, and some other assets that are not subject to income tax at death but their trust just says to split everything up equally, then their kids may end up paying tax on some of that money because they are getting a portion of the IRAs. Instead, if they worked with an attorney, the trust could be written so that the charity specifically gets the IRA assets, while the kids get the real estate and other assets.

The charity won’t pay taxes either way (because of their status as a charity), and neither will your kids because they get the property, and the entire process is optimized for everyone involved.

Option 3: Life Insurance

One of the main benefits of life insurance for estate planning is that it provides a large chunk of money that is income tax-free at death and may even be estate tax-free as well. If you have your life insurance policy in an irrevocable trust, then it would be income tax-free but would be used for your children to then pay other taxes on your estate. It is flexible liquidity.

If you have most of your assets in real estate and suddenly your kids owe a big tax bill, they may have to sell those properties when you die, and it may not be the right time to sell. They may not get full value for them, but if they have that life insurance coming their way, they can use that to pay the tax, and then they can keep the properties where they are and find the right time to sell if they want to.

These three popular options are by no means the full range of tax-minimizing strategies available in Maryland, especially if you work with an experienced estate planning attorney who also happens to have a background in tax and retirement planning.

For more information on Estate Planning For Taxation In Maryland, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (301) 396-7576 today.

Image of Attorney Daniel Razvi, Esq.

Daniel Razvi is a versatile Maryland attorney focused on providing tax and risk-optimized estate planning services. Attorney Razvi brings considerable experience and a unique perspective to the field of estate planning thanks to his comprehensive approach, which includes retirement planning, estate planning, and tax optimization.

For comprehensive and strategic insights into the field of Maryland Estate planning, connect with lawyer Daniel Razvi and his law firm, Higher Ground Legal.

Call Now (301) 396-7576

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