Table of Contents
The Biggest Financial Mistake You Could Be Making Right Now
and How to Fix It
by James Lange, CPA/Attorney
Let’s assume that either with or without our help, you are getting your tax planning right, your wills and trusts right, your Roth IRA conversions right, your investments right, etc. So, you are probably asking “What on earth am I missing? What more do I need to do?”
For years now, I have encouraged you to spend more money on yourself. I do. I have a concierge medicine doctor, a physical trainer, and a personal chef that customizes different meals for me, my wife, and our daughter, Erica. Most of my clients don’t have any of the above even though they could afford all of the above. I am not giving up on my goal to get you to spend more on yourself. But that is not my message today. Today, I am focusing on your heirs—children, grandchildren, or other beneficiaries.
Imagine this: Making more frequent and larger gifts to your heirs while you are alive you can significantly improve your family’s finances.
If you have the potential to die with a lot of money—using the most conservative assumptions—your family could be heading into a tax Armageddon.
Taxes on IRAs and retirement plans are now on steroids. The SECURE Act combined with the 2026 “sunset” provisions in the Tax Cuts and Jobs Act of 2017 (TCJA) provide the fodder for income and estate tax increases. (In 2026, income taxes and estate taxes revert to 2017 rates adjusted for inflation.)
Looming federal estate tax and income taxes on your IRA could drastically reduce your legacy. Even with all the proactive planning on investments, Roth IRA conversions, estate planning, etc., the family’s tax bill could be massive—penalized because you died with too much retirement money.
Of course, you must overprotect yourself and your spouse, but if there is excess wealth, there should be a plan for it.
“Excess wealth” will go to taxes, family, or charity. Of the three, we want to minimize taxes. This is where gifting, while you are alive, becomes a valuable strategy.
Let’s start with the basics. Straightforward $15,000/year gifts per beneficiary or $30,000/year if you are married and your spouse joins you in the gift. If you are married and are making the gift to a married child, you can make a gift of $60,000/year ($30,000 to your child and $30,000 to his/her spouse). These gifts will not eat into the amount you may leave your heirs at your death without having to pay federal estate tax. In addition, these gifts will not be included in your state estate or inheritance tax burden.
At the next level, these gifts can also reduce income taxes. For example, you could give highly appreciated stock to a beneficiary who is in a lower tax bracket. Or your gift could fund life insurance, a child’s or grandchild’s Roth IRA, or a 529 education plan—each with the additional benefit of income-tax-free elements for your beneficiary. (Please take this quote in the spirit it was offered, and feel free to substitute any pronouns you prefer!)
“Economists report that a college education adds many thousands of dollars to a man’s lifetime income—which he then spends sending his son to college.”
—Bill Vaughan (1915-1977), American columnist and author
Also, keep in mind that when you make a gift, you are reducing your estate by not only the value of the gift but also by the potential growth on the gift.
For example, you and your spouse make a $30,000 gift to your child. Assume you live for 20 years after you make the gift. Using a simple 7% interest rate, that $30,000 would have grown to $120,000 by the time you die. Pennsylvania inheritance tax savings alone would be $5,400 ($120,000 times 4.5%) and that is barely scratching the surface of what could be an effective gifting plan.
Then, there are gifts that exceed the $15,000 limit known as credit-consuming gifts. For example, let’s assume you make a $1,015,000 gift to one beneficiary. You exceeded your $15,000 limit by $1,000,000. That does not trigger an immediate gift tax but will reduce the amount you can pass at death estate tax-free by $1,000,000.
Again, factoring in the potential growth on the gift is essential. If you make a credit-consuming gift of $1,000,000 and live 20 years, you have effectively reduced your estate by $4,000,000. (The amount the $1,000,000 would have grown to had you not made the gift.) True, your estate tax reduction would be reduced by the $1,000,000 of the credit-consuming gift, but you still would reduce estate taxes on $3,000,000. Even at a 50% estate tax rate, that million-dollar gift could reduce your family’s estate tax burden by $1,500,000. PA inheritance taxes would be reduced by $180,000 ($4,000,000 times 4.5%).
Recently, worry about the federal estate tax has been a non-issue for many of us. At $11.7 million (or $23.4 million if you are married) for non-spouse beneficiaries, there was lots of room. But the sunset provision in the TCJA drops the exclusion to $5 million-plus inflation in 2026. Both President Biden and Bernie Sanders have floated a $3.5 million exclusion. But most experts think $5 million is more realistic. That said, federal estate taxes can devastate a family legacy if not properly avoided.
There is also another element of gifting while you are alive rather than after you are gone. Your kids and grandkids can benefit immediately. Think of your own situation. If someone gave you $15,000, or even $100,000 now, it would not likely change your life one iota. Think about what $100,000 would have meant to you 20 or 30 years ago.
A common objection I hear with respect to gifting is that giving too much money to a child or a grandchild could reduce their motivation to become self-sufficient. That might be true in instances where large sums of money are given to young beneficiaries. But, for adult children who have already established their values, and proven their independence, it is not clear to me that $15,000 or even $30,000 gifts will turn them from productive members of society to total slackers.
(For more information on the psychology of whether it harms a child or grandchild to receive too much money too early in their development, please visit https://PayTaxesLater.com, click on Listen on Demand, and scroll down to the shows that feature Roy Williams and Neale Godfrey).
Finally, I must confess that a bunch of my client’s children banded together and paid me a large sum of money to write this newsletter feature. Naming no names, telling no lies … I just want the humor, which I love, to be transparent to all.
Optimal Response to the SECURE Act and the New Administration:
Shift Taxable Assets to Tax-Free
Million-Dollar IRA Owners Must Take Action to
Maximize Retirement Prosperity and Generational Wealth
Tuesday & Wednesday, April 27 & 28, 2021
Register to attend: https://PayTaxesLater.com/2021Webinars
TUESDAY, APRIL 27, 2021
Session 1: 10:00 AM – NOON Eastern
Shift Taxable Assets to Tax-Free: Proven Strategies to Protect Yourself and Your Family from Devastating Tax Losses
Your IRAs and retirement plans are under attack. The SECURE Act could more appropriately be called the Massive Income Tax Acceleration on IRA and Retirement Plan Owner’s Act. The inauguration of Joe Biden, a Democratic Congress, the $1.9 trillion and other pandemic relief packages, and the Sunset Provisions of The Tax Cuts and Jobs Act of 2017 all point to massive income tax increases for IRA and retirement plan owners. How can you protect yourself and your family?
This workshop will reveal critical strategies that will help you protect your financial security and generational wealth.
What You’ll Learn:
- Effective methods of transferring assets from the taxable world to a tax-free world.
- Critical concepts and the math behind Roth IRA conversions.
- Less obvious tax increases might come from eliminating the current step-up in basis provision and the favorable capital gains rates and how you should respond.
- The Sunset Provisions of the TC&J Act of 2017 will not only increase income tax rates but also will dramatically lower the federal estate tax exemption. The strategies presented will not only save income taxes but also estate taxes.
- Optimizing your Social Security distributions.
- Gifting strategies combined with transferring assets from the taxable world to the tax-free world.
Session 2: 1:00 PM – 3:00 PM Eastern
Live Q&A with James Lange: Ask Me Anything!
Jim will answer attendees’ questions submitted in advance of the webinar as well as during the webinar. This is a golden opportunity to get straight—and personalized—answers to your most perplexing retirement questions. What haven’t you thought of? Learn even more from listening to the questions and answers from others who are in similar circumstances.
WEDNESDAY, APRIL 28, 2021
Session 3: 10 AM – NOON Eastern
The Best Estate Plan for Married IRA Owners After the SECURE Act and the New Administration
Your IRAs and retirement plans are at risk of accelerated taxation. The SECURE Act killed the Stretch IRA—the greatest tax break for IRA owners in U.S. history. Subject to exceptions, your heirs will not be able to defer taxes on inherited IRA benefits over their lifetime but will be required to pay taxes within 10 years of your death.
Does your estate plan include traditional documents that “fix in stone” the distribution of your assets to your heirs? If so, then your heirs are not likely to get the full benefit of your legacy. Updating wills and trusts for greater flexibility will allow your surviving spouse nine months after your death to determine the best strategies.
This workshop will include strategies to help ensure financial security for your surviving spouse and your heirs after you pass.
What You’ll Learn:
- The SECURE Act triggers a massive income tax acceleration on your IRAs after you pass. Learn strategies to minimize the negative impact of the SECURE Act.
- Developing the best estate plan for your family.
- Why leaving your IRA to a Charitable Remainder Trust could be more beneficial to your heirs than leaving your IRA to them outright.
- The Sunset Provisions of the TC&J Act of 2017 will not only increase income tax rates but also will dramatically lower the federal estate tax exemption. The strategies presented will potentially not only save income taxes, but also estate taxes.
- Who Gets What? By simply switching who gets what assets, you can create enormous tax savings:
- Tax-savvy charitable bequests.
- Strategies that can save hundreds of thousands of dollars if the children of the IRA owner are in different tax brackets.
- Second spouse and children from prior marriage.
- Gifting strategies combined with transferring assets from the taxable world to the tax-free world.
Session 4: 1:00 PM – 3:00 PM Eastern
Live Q&A with the Dream Team: Larry Swedroe, Adam Yofan of Buckingham Strategic Wealth, and James Lange Answer Your Questions on Investing and Wealth Management and Preservation
Larry, Adam, and Jim will answer attendees’ questions submitted in advance of the webinar as well as during the webinar. Take advantage of this golden opportunity to have your most nagging investment questions answered.
Larry Swedroe, Chief Research Officer of Buckingham Strategic Wealth, educates individuals on the benefits of evidence-based investing. Larry has authored nine books and co-authored seven books on investing, including his newest book, Your Complete Guide to a Successful & Secure Retirement. Larry has made appearances on NBC, CNBC, CNN, and Bloomberg Personal Finance.
Adam Yofan, CPA, PFS, leads Buckingham’s Pittsburgh office. Adam navigates clients toward financial clarity by defining goals and needs, reviewing assets, providing recommendations, implementing and managing portfolios, and tracking progress as they pursue well-defined goals.
Register today at https://PayTaxesLater.com/2021Webinars
Past performance is no guarantee of future results. All investing involves risk, including the potential for loss of principal. There is no guarantee that any strategy will be successful. Indexes are not available for direct investment.
Creamy Berry Smoothie
Serving Size: 1
Preparation Time: 5 minutes
- ¼ cup frozen organic strawberries
- ¼ cup frozen raspberries
- 4 ounces non-GMA silken tofu
- 2 tablespoons unsweetened hemp protein powder
- 1 teaspoon fresh lime juice
- 1 or 2 ice cubes (optional)
Combine all ingredients in a blender and blend on high speed until smooth, 1 to 2 minutes. If the smoothie is too thick, add a little water and blend again until it reaches the desired consistency. Drink immediately.
Recipe © 2015 Dr. Mark Hyman’s book, The 10-Day Detox Diet Cookbook.