Prepare for potential changes to estate taxes

The amount of assets you can exempt from federal estate and gift taxes is very generous — $11.7 million per individual. While many of us may not have this problem, you may still want to consider prioritizing estate planning.

Current federal law is set to expire at the end of 2025, reverting to a less generous exemption limit — about half of what it is now. Political or fiscal pressures might accelerate that timeline or otherwise revise how wealth is transferred from one generation to the next.

On top of that, your state may have an estate tax with an even stingier exemption amount. If it looks like you could approach the estate tax threshold in the future, start planning now to limit the tax bite. Consider these three strategies:

  1. Reduce the size of your estate.

    • You can give up to $15,000 ($30,000 for married couples) to any individual each year without gift tax consequences. There's no limit on the number of recipients of your generosity.

    • You can pay for a child's or grandchild's education or medical bills without gift tax issues, provided you make the payments directly to the school or medical facility.

    • You can combine five years' worth of gifts — up to $75,000 — in a single year by contributing to a child's or grandchild's 529 college savings plan. (You won't be able to make any other gifts to that child in the next five years.)

  1. Consider a Roth IRA conversion.

    • You can't exclude IRAs from your estate but converting some tax-sheltered retirement money (such as a 401, 457, or 403(b)) to a tax-free Roth IRA will save your heirs from future income taxes.

    • A good time to follow this strategy is after you retire but before age 72, when you're required to start taking required minimum distributions (RMDs) from traditional IRAs and 457, 401, and 403(b) plans. During those years, you can gradually convert some of that retirement money to a Roth IRA, which doesn't have RMDs. You'll owe taxes on the conversion, but thereafter, distributions from a Roth IRA are tax-free for you or your heirs.

    • The rules changed in 2020 for inherited IRAs. Non-spouse heirs typically now must deplete the Roth within 10 years, but again, the distributions will be tax-free.

  1. Get legal advice.

    • For large and more complex estates, consult with an estate planning attorney. A variety of trusts, for example, can reduce the size of your estate and trim a potential estate tax.

Please note: The contents of this publication provided by MissionSquare Retirement is general information regarding your retirement benefits. It is not intended to provide you with or substitute for specific legal, tax, or investment advice. You may want to consult with your legal, tax, or investment advisor to review your own personal situation. Some of the products, services, or funds detailed in this publication may not be available in your plan. This document may contain information obtained from outside sources and it may reference external websites. While we believe this information to be reliable, we cannot guarantee its complete accuracy. In addition, rules and laws can change frequently.

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