Many underestimate their need for estate planning

Without an estate plan, you may not recognize potential tax risks

Estate planning is always a problematic topic. Many individuals prefer not to think about why they need a comprehensive estate plan, they may believe that they do not need such a plan and they may rationalize that they can begin tomorrow.

However, unless you have consulted an estate planning attorney and gone over your financial situation, you are unlikely to have a full understanding of your potential estate and the potential problems that could reside absent the creation an estate plan.

There are a couple of things that you should consider. The federal estate tax kicks in for an individual at $5.45 million. This leaves many believing that they have no worries regarding the potential for paying federal estate tax.

What is the step-up basis of that asset?

However, one potentially problematic area is assets you may receive from your parents. They may leave you real estate or investment items such as stocks. At the time you receive them, they receive a stepped-up basis.

This step-up in basis is a benefit, in that you do not have to pay capital gains tax on the accumulated appreciation, because the basis is reset to the asset’s value at the time of transfer. If your parents have a vacation home that they purchased in the 1970s, today it may be worth vastly more than they paid, and when that asset transfers to you at their passing, it receives the stepped-up basis based on today’s market value.

While you may think of it at the valuation it had when they purchased it, in your estate, it could be worth a great deal more. The same is true of stocks. You could receive enough assets in this manner to place your estate within range of the federal estate tax limits.

What about all that tax deferred income?

Another reason to develop an estate plan is the presence of assets in tax deferred savings instruments. You may be rightly proud of having saved several million dollars within your 401(k) accounts.

What you need to remember is that when you begin withdrawing those sums after retirement, they will be taxed. For many, because they will no longer be earning income from an employer, this may occur at a lower tax rate.

However, if you have substantial amounts within 401(k) accounts, you may be required to make withdrawals that leave you at a tax rate similar to the one you currently pay. The flattening of tax brackets means there may be little tax advantage to be obtained unless you are in one of the very lowest tax brackets.

With a careful estate plan, you may be able to set up trusts, family limited partnerships or move some assets to instruments such as Roth IRAs, which provide more flexible distributions or greater tax savings.

Only a meticulous examination of your entire economic portfolio will allow you to make informed decisions, and prevent chance from crippling your future income or wealth transfer. A comprehensive estate plan can enable you to prevent unfortunate and unnecessary tax burdens from be levied on you and your estate.

Robert M. Mendell

  • Over 40 Years Experience
  • Attorney CPA
  • Board Certified in Tax Law
  • Presenter of Over 200 Law Seminars

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Robert M. Mendell, Attorney at Law, P.C.
800 Town & Country Boulevard, Suite 500
Houston, TX 77024
Phone: 713-888-0700
Fax: 713-888-0800

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