Tax Talk – Reducing Estate Taxes

Hide and seek.

Kids love this game. They are always eager to disappear and reappear in the game.

It’s amusing how little children believe that simply covering their eyes or hiding behind something makes them invisible, even when they’re right in front of us.

This childhood reminiscence led me to ponder a different kind of “hidden” aspect, estate taxes.

Recently, we completed our Friday Focus session on estate planning, and while we covered various topics, we didn’t delve into estate taxes.

The primary reason for this omission is that the estate tax limit is currently set quite high, affecting only a small percentage of the population.

However, there exists another estate-related tax, which we refer to as a “hidden estate tax” because it operates right in plain sight. This tax pertains to your IRAs and retirement accounts when they pass on to your beneficiaries.

Some people assume that their beneficiaries will inherit these IRAs and retirement accounts tax-free, but that’s not the case. If you owe taxes on these accounts, your beneficiaries will also be liable for taxes.

This is not exactly an estate tax; rather, it takes the form of income tax. The exact amount your beneficiaries will pay depends on their income tax rate at the time of inheritance.

If they receive a substantial sum from retirement accounts, it may push their income into a higher tax bracket, resulting in a higher percentage of income tax. Additionally, this can trigger higher taxes on other aspects of their financial situation.

The way this tax is structured can vary from a lump sum to installment payments or through trust arrangements, the later options could potentially reduce taxes.

Nevertheless, it remains a hidden tax because it’s not the conventional estate tax people might expect but an income tax on money that has already been subject to taxation.

Tax Talk – Reducing Estate Taxes: This hidden tax applies to all your beneficiaries when it comes to your IRA accounts, 401(k)s, and similar retirement accounts, except for Roth accounts. It’s crucial to plan ahead and strategize.

Since September marks Life Insurance Awareness Month, it’s worth contemplating reallocating some of your taxable retirement accounts that you currently don’t need for income into tax-free life insurance policies.

These policies can be customized to suit your needs, offering either a high death benefit or a robust cash accumulation component, with some even providing living benefits for long-term care or future income. (Click to learn more about the Life Insurance Multitool)

If you possess substantial IRA accounts, 401(k)s, or retirement funds, you should be aware of this hidden estate tax. Its impact depends on various factors, but it’s essential to address and plan for it.When it comes to retirement planning, the primary focus is ensuring your retirement income is secure without depleting all your accounts for that purpose. Next is to minimize the lifetime tax burden on your accounts and reduce the hidden estate tax.

If you have any questions or need guidance on this matter, please don’t hesitate to reach out. Every individual’s situation is unique, but with strategic planning, you can minimize the impact of this hidden tax. Give us a call, and we’ll help you navigate the intricacies of this financial landscape.

If you have more questions and would like to schedule a personal one-on-one call with Michelle, click HERE to access Michelle’s calendar and schedule a day and time that is convenient for you.

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