Leaving Behind too Big of an Estate Can Cause Tax Pain Later

When it comes to retirement planning, most people are focused on making sure they don’t outlive their assets. While that is key, there is a serious risk that many people overlook: leaving too much money on the table when they die. That can result in their children and grandchildren paying a premium in estate taxes.

While the federal estate-tax exemption has increased to $5.34 million, individual states have much lower limits for state taxes. In New Jersey, for example, an individual can pass down only $675,000 tax-free. Someone with an estate of $2 million would have about $1.3 million subject to a 16% state tax. However, New Jersey doesn’t have a gift tax, so if that person gave away the $1.3 million while still alive, and didn’t die within three years of making the gift, the money wouldn’t be taxed.

How do you know you have enough money to give some of it away while you’re alive?

In my practice, we do a conservative retirement projection for clients using worst-case scenarios. What happens if inflation is 2% higher than it is now? What happens if the client spends $13,000 a month instead of $10,000? Running multiple projections can help clients frame their spending within a range, so that they can feel better about spending more and still never running out.

Then we address the client’s inevitable fear of a stock-market crash. We set aside five years of their cash needs in liquid accounts such as short-term CDs and bonds, so that whatever happens, they’ll be fine.

Finally, we address what risks the client may have besides a market correction. We’ve found, for example, that many new clients are underinsured from a liability point of view.

After all of that, some people still have concerns. In those cases, we try to get them to recognize that in addition to tax benefits, there are emotional benefits that come with making gifts while they are still alive.

 

By: Howard Hook

09/21/2014