April 15 a Good Reminder to Avoid the Estate Tax Trap

By Robert Deschene, Esq

During tax season, I’m reminded of Ben Franklin’s old saw:  nothing is certain in life but death and taxes.  As we approach the dreaded April 15, many of us are focused on our income tax returns.  Still, many people also wonder or worry about whether, upon their deaths, “estate tax” will be due.

What is the Estate Tax?

When we hear the words “estate tax,” we might think they can’t possibly apply to us, but only to very wealthy people, like Warren Buffett.  Not necessarily.  The government imposes a tax on the transfer of your wealth at death.  Estate tax is the amount that your estate will owe the government, and is calculated by the value of all the property you owned at your death.

Right now, the federal government’s estate tax does not apply unless you own at least 5.45 million at death.   Relatively few of us have to worry about this.

Massachusetts’ Separate Estate Tax

The bad news is that Massachusetts is one of the states which impose its own separate estate tax, which is imposed if you die owning $1 million or more.  The graduated tax rate can run as high as 16%, which can be a significant sum that you will not be leaving to your family.  Massachusetts seniors with taxable estates often migrate to Florida, not only for the warmer weather, but because Florida has no state estate tax.

Who Pays? – Your “Taxable Estate”

Some people ignore the issue of estate tax because they don’t think of themselves as a “millionaire”.  But remember that this tax is imposed on your “taxable estate,” which includes your home and/or vacation home, death benefits payable on any life insurance policies you own (i.e., not the cash surrender value), and any balances paid out of your retirement accounts (e.g., IRAs, 401ks) when you die.   If you total up these assets, or project their future value, you may easily exceed the $1 million threshold for paying estate tax, even though we don’t feel like millionaires.  So do the math.

Ways to Reduce your Taxable Estate

If you think you exceed, or will exceed, the threshold, there are ways to avoid or minimize paying estate tax, but you have to plan ahead.   You can’t just give away large assets to your family during your lifetime so they won’t be included in your taxable estate.   But the government will allow you to make many “small” gifts ($14,000, or $28,000 for spouses) every year, and you can give that amount to as many people as you want, even to non-family members.  You also can make direct payments to a college or medical provider to pay for someone’s tuition or medical expenses, even if the gifts exceed $14,000.   Over time, this repeated annual gifting can reduce your taxable estate dramatically, while still using your property to help your family.

If You Don’t Plan …

Married couples can protect up to $2 million from estate tax, provided they use the right estate plan, and not “simple wills.”  Although you can leave any amount to your spouse tax-free on your death, each spouse has their own $1 million tax exemption“coupon,” which can shelter that amount of assets from estate tax.   Married couples can leave any amount to their spouse tax-free, using the unlimited marital deduction.  But if they rely only on the marital deduction, the first spouse dies without using their $1 million coupon, and it was wasted.  The surviving spouse will then own $2 million when he or she dies, but will have only their own $1 million “coupon” left to use.  Estate taxes will be due.

Using Bypass Trusts to Eliminate Tax

Robert Deschene, Esq.

To avoid this result, an estate plan can provide that the coupon of the first spouse to die will be used to shelter $1 million of their assets, which will then be placed tax-free into a “bypass” trust.   The surviving spouse can still use the money in the bypass trust during their lifetime, but later, the surviving spouse can use their second “coupon” on the remaining $1 million of assets.  Result: no estate tax paid on $2 million!

Irrevocable Life Insurance Trusts

Finally, your ownership of life insurance policies that will pay out large death benefits to your family may expose you to estate tax.   Who owns the policy is usually not that important.  If you create an irrevocable life insurance trust to act as owner of these policies, your family will still get the proceeds without your estate paying estate tax.

Although death and taxes may be certain, you can do something proactive to avoid death taxes.

Many Retirees Face April 1st Deadline to Take Required Retirement Plan Distributions

WASHINGTON — The Internal Revenue Service today reminded taxpayers who turned 70½ during 2015 that in most cases they must start receiving required minimum distributions (RMDs) from Individual Retirement Accounts (IRAs) and workplace retirement plans by Friday, April 1, 2016.

The April 1 deadline applies to owners of traditional (including SEP and SIMPLE) IRAs but not Roth IRAs. Normally, it also applies to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.

The April 1 deadline only applies to the required distribution for the first year. For all subsequent years, the RMD must be made by Dec. 31. So, a taxpayer who turned 70½ in 2015 (born after June 30, 1944 and before July 1, 1945) and receives the first required distribution (for 2015) on April 1, 2016, for example, must still receive the second RMD by Dec. 31, 2016.

Affected taxpayers who turned 70½ during 2015 must figure the RMD for the first year using the life expectancy as of their birthday in 2015 and their account balance on Dec. 31, 2014. The trustee reports the year-end account value to the IRA owner on Form 5498 in Box 5. Worksheets and life expectancy tables for making this computation can be found in the appendices to Publication 590-B.

Most taxpayers use Table III  (Uniform Lifetime) to figure their RMD. For a taxpayer who reached age 70½ in 2015 and turned 71 before the end of the year, for example, the first required distribution would be based on a distribution period of 26.5 years. A separate table, Table II, applies to a taxpayer married to a spouse who is more than 10 years younger and is the taxpayer’s only beneficiary. Both tables can be found in the appendices to Publication 590-B.

Though the April 1 deadline is mandatory for all owners of traditional IRAs and most participants in workplace retirement plans, some people with workplace plans can wait longer to receive their RMD. Usually, employees who are still working can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions. See Tax on Excess Accumulation  in Publication 575. Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.

The IRS encourages taxpayers to begin planning now for any distributions required during 2016. An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner. Often, the trustee shows the RMD amount in Box 12b on Form 5498. For a 2016 RMD, this amount would be on the 2015 Form 5498 that is normally issued in January 2016.

IRA owners can use a qualified charitable distribution (QCD) paid directly from an IRA to an eligible charity to meet part or all of their RMD obligation. Available only to IRA owners 70½ or older, the maximum annual exclusion for QCDs is $100,000. For details, see the QCD discussion in Publication 590-B.

For more information on RMDs, including help in calculating what your RMD should be, please contact our office today.

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Join NFS @ Mr. Dooley’s Olde Irish Pub Run

Mr. Dooley’s Olde Irish Pub 5k/10k Run
Olde Irish Pub Run Facebook Page
Saturday, March 26th, 2016
9:00 am start

  • WRENTHAM — The 4th annual Olde Irish Pub Run will be held on Saturday, March 26th, at 9 a.m. from Mr. Dooley’s Olde Irish Country Pub, 303 Shears St., Wrentham.

    The USATF-certified course loops around scenic country roads, and participants can choose a flat single loop (5K) or double loop (10K).

    Prizes will be awarded to the top three male and female finishers in various age categories. The first 100 participants who register by March 16 will receive free T-shirts. The post-race buffet will be provided by Mr. Dooley’s Olde Irish Country Pub.

    The registration fee is $35 or $40 the day of the race. Sign up online HERE. Proceeds benefit King Philip Regional High School Track & Cross Country. Sponsored by NFS – Northeast Financial Strategies Inc, Marathon Sports, NRG LabMr. Dooley’s Olde Irish Pub.

New Social Security Rules Coming in May 2016

By Robert Deschene, Esq.

Security CardPeople approaching retirement age rely in part on Social Security (SS) to maximize their retirement income, but they also face a labyrinth of confusing laws and regulations.

The dilemma: at what age is it best for you (or your spouse) to start collecting so you get the most retirement dollars? There are no easy answers to that question, and the questions just got more difficult.

New Budget Bill – Surprise!

Congress just enacted and the President signed into law a bipartisan budget bill designed, in part, to avoid another government shut-down.   Effective May 1, 2016, the new law makes major changes to the rules about when and how retirees can claim their SS benefits, and eliminates several planning strategies previously available to them to get more benefit dollars.

The Basics Stay the Same

Some basic rules stay the same.  In general, you can begin collecting SS as early as age 62, but your monthly payment will be much lower than if you delayed collecting until your “full retirement age,” which is between ages 66 and 67 (depending on the year you were born).   Once you start collecting then, your monthly payment amount is locked in, and will never increase (except for annual cost-of-living increases).   But if you further delayed collecting past your full retirement age, and wait until age 70 to collect, your monthly payment increases about 8% a year.

File-and Suspend, or “Having Your Cake and Eating It Too” is Kaput

One lucrative planning strategy no longer available after May was called “file-and-suspend.”  Say Tom and Jane both reached their full retirement age of 66, Tom intends to keep working until at least age 70, but Jane wants to retire now.  Each could start collecting on their own SS, Tom at $1500/month and Jane at $600/month, or $2,100/month.  Instead, Tom would file immediately to collect on his SS, but then “suspend” his right to collect.  Why?

If Tom waited to collect his own SS until age 70, his monthly payment amount would increase about 8% over the next 4 years, and at age 70, he would be able to collect $1980/month, rather than $1500.

Once Tom filed and suspended, Jane had the right as his spouse to collect on Tom’s SS account, and she immediately started collecting one-half of what Tom would have collected, or about $750/month.  Meanwhile, because she is not touching her own SS ($600/month), it would increase to $792/month by the time she reached 70.  At age, Jane would have collected about $36,000 on Tom’s suspended claim, and then Tom and Jane both would start collecting on their own SS, for a combined monthly income of $2,772, instead of only $2,100.

The new law eliminates your ability to maximize benefits under this “file and suspend” by requiring that Tom actually start collecting on his SS at age 66 before Jane can claim her one-half spousal benefit on his SS account.   The new law made several other changes that tighten up the filing rules.

Robert Deschene, Esq.

What You Need to Know … or Do

Why is it important that you know about these changes in the law.  First, since it doesn’t take effect until May 2016, there is a brief “window” for those who are at least 66 (or who will turn 66 by April 30) to get “grandfathered” in to the old rules.

Also, your financial advisor may have projected your estimated retirement income based on the old rules, and you may want to discuss the implication of these changes in the law.  SS was intended only to supplement other sources of retirement income, such as 401(k)s and IRAs, and you may have to adjust your planned use of 401(k)s and IRAs to offset the lost SS income.  You and your advisor also may have to reconsider whether it makes more sense – or less – for you to delay collecting SS until you reach age 70, when you will receive the maximum monthly SS payment.