Estate Tax Planning Question

Last Tuesday I attended a networking group for women at Zin on the lake in Westlake Village. Since we have been having mild summer weather it was a wonderful choice of locations to have a drink and mingle with the other ladies who attended.

I was listening to a conversation between one of the ladies who announced to the Estate Planning Attorney that she had recently learned there is a death tax. I like to think of it as an Estate tax as it is usually paid by very large estates. She wanted to know if there was a way around it. The Attorney explained that this year (2010) the tax on estates is nil and until Congress does something it may be based on assets over $1 million in 2011. She could reduce her estate by gifting $13,000 to whomever she wanted to.

The conversation came to mind over the weekend.

The Attorney never mentioned that one of the options available to cover the tax is having an Irrevocable Life Insurance Trust that would purchase life insurance to cover the amount of estate tax that might be owed at her death. If the premiums are large she can set up the trust with gifts to her kids or grandkids that would go to pay the premium.

An attorney knowledgeable in Irrevocable Life Insurance Trusts would need to be consulted along with a CPA and a knowledgeable insurance agent.

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SandraCherry, August 9th 2010 | Tags: , ,
Posted in Estate Planning, Financial Planning, Insurance

6 IDEAS FOR WHO MIGHT BE GOOD IRA CONVERSION CANDIDATES

1. A young person is an excellent candidate to do an IRA to Roth conversion due to the length of time they have to recover from the tax hit. Remember, the income tax has to be paid within two years of the conversion.

2. If someone is in the early years of their retirement, they expect to live a long time and won’t need to access the IRA assets for at least five years, a conversion may well be worth it. It comes down to how long it will take to recoup the income tax hit.

3. If already retired and receiving Social Security (SS) converting to a Roth could reduce the tax owed on the SS income. The conversion might bump up the amount of SS that is taxed in the conversion year and reduce the amount of taxes owed on SS in future years. Roth distributions don’t factor into the calculation used to calculate which SS benefits will be taxed.

4. People who have made nondeductible IRA contributions are good candidates. The gain on the account is all that is taxable.

5. Someone who has a large estate should look at the IRA conversion. Two things to consider:

Roth IRAs do not require a mandatory distribution allowing assets to compound and increasing the amount that may be passed to heir’s tax free.

The overall assets passed to heirs will be smaller since some assets are used to pay the income tax on the conversion. It could reduce estate-tax liability if there is any. As of this writing there is an exemption of $3,500,000 per person before the estate tax kicks in.

6. For those that are unemployed or who have income that is appreciably lower than usual, it might be advantageous to convert provided there is cash available to pay the tax. The tax will be lower if you are in a lower income tax bracket.

Always consult with your tax advisor.

Next time I’ll discuss who should not be considering a conversion. Until then………..

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SandraCherry, November 20th 2009 | Tags: , ,
Posted in Financial Planning, Tax Planning

HOW TO DECIDE IF YOU WANT TO RETAIN A MORTGAGE–CASH FLOW ANALYSIS

Last week my client, LM, and I met for the second time with my associate Michael Hunter of MJHunter in Thousand Oaks. LM is 62, has $1 million in CDs, no credit card debt and no car payments. One of her concerns is whether or not she should maintain the mortgage she refinanced about 6 years ago or pay it off.

First, we prepared a cash flow analysis to calculate how long LM’s $1 million in savings will last based on her lifestyle, current expenses and an estimated life span of another 30 years. Then we made adjustments to the analysis to determine if it makes sense for LM to pay off her mortgage.

While the mortgage rate is adjustable over the next 23 years, the actual cost of the mortgage is 10%. This rate is determined by taking the actual mortgage balance of $141,000 divided by the amount of annual payments ($14,000). The question we have to ask is: if LM pays off the mortgage, how much will it actually cost her in loss of income? The answer is very little, because the money she would use to pay off the mortgage is earning less than 1%.

Our second cash flow analysis, which had the mortgage paid off and an estimated return on investments averaging 5%, showed that LM’s principal would last beyond 30 years and leave a small sum for her heirs.

Because LM doesn’t have any income other than what her CDs are earning in interest, we need to reconfigure her investments to earn a higher return so she won’t run out of money. Michael and I will meet again this week to brainstorm about investments that would generate this target income of 5%, as well as be appropriate for LM’s risk tolerance and time horizon.

In the meantime, LM is very happy about the idea of turning $141,000 of debt into equity in her home.

Until next time……………………Sandra

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SandraCherry, October 29th 2009 | Tags: , , ,
Posted in Financial Planning