Many if not most people identify themselves as average, middle class folk, even though in reality — by virtue of income, lifestyle, education and luck — we may actually live better and have more than we think. More than many others who are genuinely statistically average.
Things like estate planning are for the people, either through birth, work or luck (or all three), who have a bona fide estate. Most of us are worth more dead than alive. And that’s especially true for federal and postal workers, and career military personnel, who over a lifetime of work/service earn an annuity with survivor benefits, have a generous 401k plan (the Thrift Savings Plan) and life insurance. Not to mention maybe a home. Maybe even a place at the beach or in the country.
For many career feds, a will downloaded from the internet may not do the job. The one-size-fits-all doesn’t cut. It may not carry out your wishes and can trigger legal, logistical and emotional issues that could last decades.
Tom O’Rourke, an estate-tax attorney, recommends that everyone, especially members of the federal family, have an estate checkup every three years. At least. For lots of reasons, including taxes. He’ll be my guest today on Your Turn at 10 a.m. ET streaming here or on the radio at 1500 AM in the D.C. metro area. Here’s what O’Rourke, himself a former federal employee with the IRS, had to say:
Federal workers probably appreciate the value of a fair tax system as well as any group in the country. Maybe better than most. Maybe because they are on both the giving and receiving end of taxation. And they actually see the sausage being made and know how good (or not) the end product is.
Most working or retired adults probably feel everyone should pay their fair share. Starting with themselves. But don’t overpay. Especially out of ignorance or indifference. That’s an expensive shoulder shrug. Why? Because tax rules change all the time. And most of us can’t keep up. As a result, you or your estate may pay way too much to the state or federal government. Many don’t worry about the status of their “estate” because they feel they don’t have one. But if you’ve been working for a while, especially for Uncle Sam, odds are you may own property. And have a bank account. And money in the TSP. If you check off any of those boxes, you have an estate. And there is a good chance you are worth more dead than alive. Sad, maybe, but true. So what can you do about it?
Most people who have been through a death in the family know that being prepared and doing the best for your loved ones and friends is more than a will you downloaded or instructions that your favorite nephew gets your car (and any remaining payments).
My typical response to the how-often an estate plan needs a checkout and review, and maybe a modification is when your circumstances change, or when the law change,” he says. “ Only you know if your circumstances change. Common examples of a change in circumstances that require modification of an estate plan are a birth, death, marriage, divorce, and change in relationship with a person mentioned in your plan, or a change in your financial situation. Your advisers (lawyer or financial planner) should advise you of any changes in the law that impact your estate plan.
In recent years, there have been a number of changes in the law that make it prudent to review your estate plan. The passage of the Secure Act in 2019 made two changes that could impact your strategies. Specifically, it increased the age at which an individual must begin to withdraw money from tax deferred accounts from age 70 ½ to age 72. Second, it eliminated the ability to use a stretch IRA. A stretch IRA allowed the beneficiary of a tax deferred plan to spread payments from a tax deferred account over his/her life.
There are also ongoing discussions about making major changes in the estate tax laws. A bill to reduce the estate tax exemption from its current level of $11.7 million to $3.5 million has been introduced. While this is still a very expectancy. The Secure Act limited the deferral period to 10 years for many beneficiaries. You may wish to consider the impact of this change on the persons you name as beneficiary of any tax deferred funds you may have.
Large exemption, some folks who have government pensions, TSP accounts, life insurance, and homes may approach or exceed this level. In addition, there have been discussions about limiting or eliminating other estate tax benefits. At this time, there have merely been general discussions and no concrete proposal. It is advisable to stay tuned so you can determine what, if any, changes you wish to make to your estate plan.
Some of the strategies that you may wish to consider are as follows:
Rethinking your IRA strategy. Is it prudent to convert to a Roth IRA?
Take advantage of the $15,000 per person gift tax exclusion.
Take advantage of the ability to pay education or medical expenses of a loved one. This not only avoids gift tax, but also reduces estate tax exposure.
Using a section 529 plan account to help a child or grandchild and also avoid taxes.
Consider establishing a trust to provide for the care of a spouse while reducing tax exposure and controlling the ultimate distribution of your assets.
Protect Assets from the claims of any creditors of a beneficiary.
At present perhaps the best advice is to pay attention to estate tax changes that Congress may implement and discuss these matters with your advisers. And do it at least every 36 months. If you do so, your estate plan can be modified to meet you goals in a tax efficient manner.
Listen to today’s show. It could save you and your family lots of money and heartache!
The word taser is actually acronym. Created in 1974 by NASA researcher Jack Cover, the name of the weapon actually was named after Tom Swift, a character in a series of adventure books about a teenager inventor. Swift creates an electricity shooting rifle in one of the books. Cover used that as inspiration and with a little flexibility came up with Tom Swift and His Electric Rifle, aka the taser.