Texas Estate Planning

Tax Season and Estate Planning

It’s that time of year again–where we scrounge up paperwork and receipts, putting everything together in order to file taxes. It might not be fun, but it’s necessary and could even put you in a good position to start your estate planning process. 

 

In a Forbes article titled, “How to Take Advantage of Tax Season to Tackle Estate Planning,” financial experts stated that, “without estate planning documents, an estate loses anywhere from 3% to 8% of its value to legal costs and fees.” This loss can be detrimental for families and more costly than paying an attorney to get documents in place ahead of time. 

 

The main reason folks don’t have an estate plan in place is simply because they haven’t gotten around to it (caring.com). But it’s not an option to “get around” to your taxes. So while you have everything together, start the search for estate planning attorneys in your area. 

 

The National Institute on Aging has an excellent guide to “Getting Your Affairs in Order” which includes a helpful list of financial documents you will need when completing your estate plan:

 

• Source of income and assets (pension from your employer, IRAs, 401(k)s, interest, etc.) 
• Social Security and Medicare/Medicaid information 
•  Insurance information (life, health, long-term care, home, car) with policy numbers and agents’ names and phone numbers
• Names of your banks and account numbers (checking, savings, credit union) 
• Investment income (stocks, bonds, property) and stockbrokers’ names and phone numbers 
• Copy of most recent income tax return 
• Location of most up-to-date will with an original signature 
• Liabilities, including property tax–what is owed, to whom, and when payments are due 
• Mortgages and debts–how and when they are paid 
• Location of original deed of trust for home 
• Car title and registration 
• Credit and debit card names and numbers 
• Location of safe deposit box and key 

I’ve started organizing my documents, but now what do I do? 

 

Filing taxes and finding documents are both hefty tasks in their own right, but as you conduct your search, you might come across other important papers that will be necessary in the estate planning process. Birth certificates, marriage licenses, social security cards, and even old wills should be set aside and stored in a safe place for future estate planning, or just life in general. 

 

First, we recommend calling an Estate Planning Attorney so that you know you’re gathering all the items that they’ll need from you. Then, tell someone who you know and trust about the locations of the documents, preferably someone you’ll name as executor or beneficiary in your Estate Plan–your documents won’t be helpful if no one can find them. 

 

Check two things off at once by preparing for your estate plan while doing your taxes! 

 

In the mood to organize? Download our free, printable e-book to help you keep important information together for your loved ones who might need it someday. Download Ebook- what you didn't know you needed to know.

Yes, You Have to Pay Taxes on Social Security—Sometimes

It’s like listening to your know-it-all brother-in-law bragging about how much he’s made on a stock, when you know full well that his financial situation is bad. Some people do have to pay taxes on their Social Security benefits. But some, as reported in the Tyler Morning Telegraph’s news story “Plan Retirement Right: Social Security and Income Taxes,” don’t.

Seems counter-intuitive. After all, didn’t you work all those years and weren’t those benefits supposed to be yours, tax free? The Internal Revenue Service determines who has to pay income tax on Social Security benefits, and they do so, using a number known as “Combined Income.” That’s a number unique to you and your spouse that determines whether a portion of those benefits are taxable. It’s not the same as another IRS number you may know all too well—your AGI or Adjusted Gross Income.

Here’s how you calculate it:

Adjusted Gross Income + Nontaxable Interest + HALF of your benefits = Combined Income.

You’ll also need to consider a few situations, where you may end up owing taxes on some portion of your Social Security benefits:

• If you file taxes as an Individual and your combined income is anywhere from $25K up to $34K, you might owe taxes on as much as half of your benefits.
• Or, if you file taxes as an individual and your combined income is over $34K, you may owe as much as up to 85% of your Social Security benefits.

Joint filers, “married, joint,” may owe taxes, if the combined income for you and your spouse is anywhere from $32K to $44. You may owe taxes on up to 50% on your Social Security. If the Combined Income for you and your spouse is more than $44K, you may owe taxes on up to 85% of your Social Security benefits.

Even if you file taxes “married, separate,” the IRS says it’s likely that you’ll be paying taxes on benefits.

Here’s how to handle this unwelcome tax burden:

Estimated Tax Payments. If you’ve been self-employed, you may be accustomed to doing this every quarter. You’ll have to be disciplined to make sure to set aside funds and pay on time.

Withholding. Some people have Social Security withhold the portion of the amount they would otherwise have to pay taxes on. This works well for people who have been employed and are used to having someone else manage their deductions. You’ll need to use IRS Form W4-V and select from a few different levels of deductions: 7%, 10%, 12% or 22%.  

Reference: Tyler Morning Telegraph (Dec. 26, 2018) “Plan Retirement Right: Social Security and Income Taxes”

Does Wealth Flee High Taxes?

No one likes paying taxes. Most people given the option to pay fewer taxes would choose to do so. This creates a dilemma for state governments in the U.S. where people can freely move to other states. Legislators often fear that if they raise taxes on their wealthiest residents, those residents have the means and ability to move to other states that have lower taxes.

The possibility of this happening is guaranteed to be mentioned in any legislative debate about the appropriate amount to tax the wealthy.

However, as Private Wealth discusses in "Higher Taxes Don't Scare Millionaires Into Fleeing Their Homes After All" the legislative fears are mostly unfounded.

A new study looked at 13 years of data and concluded that very few wealthy people move to pay lower taxes. The study found that rich people move because of taxes only 2.2% of the time. In fact, millionaires move to different states at a lower annual rate than the general population.

People who only make $10,000 a year are more likely to move to another state than are millionaires. The reason for this is that wealthy people are not normally idle. They are employed or own their own businesses. They cannot simply pick up and move.

This study looked at income tax rates. It will most likely be cited in estate tax debates as well. That could be a mistake as once the wealthy retire it stands to reason that it is easier for them to move.

Reference: Private Wealth (May 26, 2016) "Higher Taxes Don't Scare Millionaires Into Fleeing Their Homes After All"

Estate Planning for the Farm

In “Planning for Farmland,” the Black Hills Pioneer reports that a quarter of the nation’s agricultural land is likely to change hands in the next decade, according to the USDA Natural Resources Conservation Service. That land needs to remain productive and valuable. This important objective can be achieved with an effective estate plan. The NRCS says that a sound estate plan can help accomplish at least four goals:

• Transfer ownership and management of the agricultural operation, land, and other assets to a new operator;
• Avoid unnecessary transfer taxes, such as income, gift, and estate taxes;
• Provide for financial security and peace of mind for all generations;
• Foster the next generation’s management capacity.

The American Farmland Trust (AFT), an organization operating under the NRCS, serves agricultural landowners, concerned citizens, planners, local officials, state agency staff, land trusts and policymakers. The AFT answers complex questions on all types of issues.

Talk with a qualified estate planning attorney and make sure your hard-earned investment and family legacy is properly protected.

Reference: Black Hills Pioneer (September 4, 2015) “Planning for Farmland”