Estate Planning versus Tax Planning Knowing the Difference
Comprehensive Overview for 2024
In the constantly evolving financial landscape of 2024, understanding the intricate dance between tax and estate planning is not just a skill, but a necessity for astute financial management. These two domains, while distinct, intersect in ways that can significantly impact your financial future. Let’s explore the key differences, strategies, and real-life examples that underscore the importance of tactical planning in these areas.
Advanced Wealth Management's Tax Planning Solutions- Maximizing Wealth During Your Lifetime:
Let’s talk about the difference between tax preparation, tax planning, and tax management. Tax preparation is a historical accounting of what happened over the previous year. You give your accountant your 1099s and they tell you how much you may or may not owe in taxes. Tax planning is developing a plan for how to proceed into the coming year so that there are no major surprises come April 15. Tax management is the most important component because it involves proactively pursuing tax management alpha, helping you capitalize on the profound opportunities that exist. Enhancing your financial health is the primary goal of tax planning, which is a dynamic tool. It's about smartly managing your assets to reduce income and capital gains taxes, maximizing what you keep and reinvest during your lifetime.
At AWM, we employ:
1. Diverse Tax Strategies: From basic deductions like mortgage interest and childcare credits to advanced structures like IRAs and Charitable Remainder Trusts, we explore the full spectrum.
2. Education Importance: Understanding tax rules can be complex, but the payoff is immense. In a progressive tax system like the U.S., effective tax planning is a powerful lever for financial efficiency.
3. Deferring Taxes on Unrealized Investment Gains: Utilize strategies like Charitable Remainder Trusts, where you can defer taxes on unrealized capital gains for life, much like Phil Knight’s ~$890 million in Nike stock contributions to charitable trusts.
Opportunity Zones: Defer taxes on realized capital gains until 2026 and potentially avoid capital gains taxes on real estate investments in specified areas.
Reducing Taxes on Realized Income: Explore options like Charitable Lead Annuity Trusts, which allow deductions of up to 100% of your income in exchange for future charitable donations.
Our science-based SWAG Retirement Roadmap: Our process will take you through the entire journey, however long it takes, and help you navigate around any unexpected contingencies you may encounter. We do this by dividing your money into four segments, each designed to carry you through different stages of your financial life in retirement and proactively tax planning with strategies like Roth IRA conversions and active tax loss harvesting strategies.
Estate Transfer Planning: Securing Your Legacy
Estate planning focuses on strategies to shield assets from taxation when transferring to future generations. This becomes critical when your assets exceed the federal estate tax exemption, which stands at $12.92 million for individuals and $25.84 million for couples in 2024. Without proper planning, significant federal and state estate taxes can erode the value of the inheritance.
Federal Estate Taxes How much are federal transfer taxes? On the high end, federal estate taxes alone can reach 40%. This means that if you have $1 million over and above the federal estate tax exemption, you would owe $400,000 in federal estate taxes and leave $600,000 behind for your beneficiaries, even before accounting for any state tax liability.
State Estate Taxes: In addition to federal taxes, some states impose their own estate and gift taxes. These taxes can vary widely across states. Furthermore, while inheritances are not considered income at the federal level, certain states do tax inheritances, with rates ranging from 0% to 18%. The progressive nature of these taxes means larger inheritances incur higher taxes.
Probate Process and Fees: Probate is a critical legal process for administering a deceased person's estate. It ensures assets are distributed per the deceased's will or state laws if no will exists. This process, overseen by a probate court, often requires legal assistance. Probate fees, which can vary greatly, depend on the estate's complexity and the work involved in its administration. It's important to plan for these fees as part of comprehensive estate planning, as they can significantly impact the estate's value and the distribution of assets to beneficiaries.
An Avoidable Problem: For instance, I recently assisted a client in negotiating a reduced attorney fee to 3% for probate. Her husband had passed away, leaving individual stocks held at Computershare in his name. These assets required probate due to the absence of a beneficiary designation. The lack of a Transfer on Death (TOD) arrangement, which we could have facilitated for free at Schwab had he told me about these stocks, resulted in close to $15,000 in costs and a six-month probate process. This scenario underscores the importance of thorough estate planning and the potential financial and time costs associated with oversight in designating beneficiaries.
Strategies to Minimize Estate Tax
If you have or anticipate having a large estate, there are multiple ways to reduce the amount that will be taxable when you give it away.
At Advanced Wealth Management (AWM) we offer various estate planning solutions, including:
Lifetime Giving: Reducing your taxable estate through gifts can be a strategic move.
Grantor Retained Annuity Trust (GRAT): Enables you to pass on assets to your kids without the gift counting towards lifetime exemption
Irrevocable Life Insurance Trust (ILIT): Hold a life insurance policy against your life but the payout goes to the beneficiaries without incurring estate taxes
Spousal Lifetime Access Trust (SLAT): An irrevocable trust where one spouse makes a gift into a trust to benefit the other spouse (and potentially other family members) while removing the assets from their combined estates
Charitable Lead Annuity Trust (CLAT): Similar to a GRAT, this enables you to pass on assets to your kids without it counting towards your lifetime gift exemption but also sends a large amount of the proceeds to charitable entities, often a family foundation
Passing on your IRA by using a CRT to replicate a Stretch IRA: A replacement for the Stretch IRA that enables you to pass on assets to your kids while they continue to grow on a pre-tax basis without a 10-year forced withdrawal.
Our Approach at Advanced Wealth Management
As your financial goals and situation evolve, so should your estate planning strategies. At Advanced Wealth Management (AWM), our approach is comprehensive, leveraging our expertise and a nationwide network of legal partners to provide tailored solutions. We strive to democratize estate and tax planning knowledge through our in-house services and strategic relationships. Our Boutique Family Office assists families with a suite of services, ensuring a holistic, convenient planning experience. We guide you through the complexities of federal and state estate taxes with personalized, comprehensive planning advice to ensure efficient wealth transfer to future generations.
In summary, navigating the complexities of federal and state estate taxes requires a strategic approach. By understanding these differences and employing effective planning tools, you can ensure a more efficient transfer of your wealth to future generations.
Knowledge is Power! Being well-informed about tax and estate planning strategies can significantly enhance your financial freedom and security. In a world where financial landscapes constantly evolve, staying ahead with smart planning ensures that you not only grow your wealth but also protect and pass it on efficiently. Embrace this journey with confidence and foresight. Contact AWM for personalized, comprehensive planning advice.
Tony Gomes, MBA
CEO and Founder
Advanced Wealth Management
Content Disclosure: This information is general in nature and has been prepared solely for informational and educational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. It's not a substitute for professional accounting, legal, tax, insurance, or investment counsel. While we believe the information shared is both accurate and reliable, we don't guarantee its completeness or precision. The insights might include forecasts, opinions, and discussions about economic conditions, market scenarios, or investment strategies. However, these are subject to change, and there's no assurance they'll prove accurate.
