Three Estate and Gift Planning Considerations for Baby Boomers
Despite popular belief, all taxpayers should be proactive about estate planning, especially Baby Boomers, who are nearing or have already entered retirement.
Over the years, estate planning has developed a connotation of something only the wealthy classes and their private advisors need to worry about. This misconception has led many to believe that they don’t need to think strategically about their hard-earned nest egg or their future beneficiaries. In reality, these are issues that everyone should address.
Proactive estate and gift planning is important for all tax payers particularly for Baby Boomers (a generation heading full force into retirement age and beyond). First, it provides clarity. It outlines a game plan for all individuals involved, and helps protect assets for beneficiaries down the road — a spouse, children, or otherwise. The rise of blended family structures (through divorce and remarriage), has made this an increasingly important concern. Additionally, estate planning ensures that relatives aren’t left scrambling through paperwork and last-minute decisions.
Second, and equally important, early estate and gift planning can help minimize taxes for Boomers and their beneficiaries. While the estate tax exemption is remarkably high ($5.43 million per person for 2015) and likely applicable to a small slice of the population, there are still effective estate planning techniques that taxpayers should consider.
- Lifetime giving: One of the simplest ways to reduce income taxes and posthumous estate taxes is to eliminate assets from an estate through gifting. Each year, individuals can give gifts of up to $14,000 – to as many recipients as they’d like – without being subject to gift tax. Boomers may also make unlimited payments to educational institutions or medical providers on someone else’s behalf (e.g., grandchild’s college tuition or relative’s emergency surgery) without incurring tax. If certain federal rules are met, these payments don’t count toward the $14,000/year limit either.
When gifts exceed the $14,000 annual threshold, taxpayers can either pay the gift tax on it or elect to use the unified credit. When using the unified credit, the gift’s cost is instead deducted from the taxpayer’s lifetime exemption (the $5.43 million mentioned above), reducing the amount that may be counted toward estate taxes.
- Charitable giving: Donating to charity is another common practice taxpayers take advantage of to deduct for income and estate tax purposes. Some Baby Boomers may want to create a trust specifically for these reasons, such as a charitable lead or remainder trust. While lead trusts help shield some assets from estate taxes, remainder trusts offer an immediate income tax deduction and guarantee that no capital gains tax is owed when assets in the trust are sold.
A recent development to note is that December 31, 2014, was the last day for making qualified charitable donations from an individual retirement account (IRA). 2014 was also the last year that taxpayers over 70½ years old could exclude up to $100,000 from their gross income for charitable donations paid from their IRAs. It’s debatable whether or not Congress will extend these rules for 2015 and beyond.
- Retirement planning: The web of complex and constantly evolving rules around IRA distributions puts the burden on Baby Boomers to understand the tax implications of their retirement account decisions. Currently, for example, if a taxpayer dies before full distribution of his or her IRA, the IRA may be paid out over the lifetime of the beneficiary. But a proposal from President Obama’s FY 2016 budget seeks to amend the rule so that non-spouse beneficiaries would have to take distributions over no more than five years.
Another consideration is whether or not to roll IRAs into trusts. Naming a trust as an IRA beneficiary offers multiple advantages, such as protecting retirement funds from creditors and limiting unfettered access by minor beneficiaries. Creating an IRA trust for a spouse, however, may be counterproductive or unnecessary, as spouses have the freedom to roll inherited IRA funds into their own accounts directly.
Similar to charitable giving, there are different types of trusts taxpayers can set up for retirement funds, including accumulation and conduit trusts; depending on whom the beneficiary or beneficiaries are, different trusts may carry varying tax implications.
Contrary to popular belief, all taxpayers should be paying attention to their estate and gift planning; if they haven’t done so already, Baby Boomers and their families may soon be faced with tough decisions. By implementing some simple estate planning techniques, taxpayers can reduce the likelihood of administrative confusion and possibly reduce tax burdens for themselves and their beneficiaries.
Read a recent special report, The Year in Review: An Estate Planner’s Perspective on Recent Tax Developments for more information about how proposed changes to estate and gift tax regulations will impact Baby Boomers’ estate planning going forward.