Tips for Minimizing Your Taxes as Retirement Approaches

As you work toward implementing your succession plan, and ultimately, retiring, it’s wise to also be considering the tax implications from the sale of your business. You will likely receive a substantial amount of money for your business or your share of it, which could result in an increased tax liability if you don’t plan ahead.

You want to begin employing tax strategies well ahead of your retirement so that you can get the greatest tax advantage from year to year. This may mean periodically revising your estate plan.

Forbes reports that 30% of business owners don’t even have an estate plan! Of those that do, many have failed to keep it current. If you don’t have an estate plan or have not updated it within the last year or two, it’s definitely time to do so.

Here are four tax strategies to discuss with your financial advisor that may help to protect your family’s wealth and allow you to leave a greater legacy for future generations.

Life Insurance

Life insurance can help provide immediate cash to fund a buy-sell agreement or allow heirs to pay off any business debts. Life insurance policies can provide tax advantages if implemented properly. For example, if you own the policy on yourself, the death benefit is part of your taxable estate. However, if the policy is placed in a trust or purchased through a certain type of trust, then those estate taxes can be avoided.

For example, you can create an irrevocable life insurance trust (ILIT). Irrevocable means you will generally be unable to modify or terminate the trust. This type of trust is funded with a life insurance policy or policies taken out on you (the grantor), with the insurance policy owned by the ILIT, which is also the beneficiary. Using an ILIT will exclude life insurance proceeds from the taxable estate.

Trusts

Trusts are a fiduciary relationship in which a third party, or trustee, holds assets on behalf of the beneficiary or beneficiaries. There are various types of trusts that you can use in your estate plan, including the ILIT. Other commonly used trusts include charitable remainder trusts, generation-

skipping trusts and grantor retained annuity trusts. Depending on the trust, it may be irrevocable or revocable, meaning it can be changed or terminated by the grantor during his or her lifetime.

Trusts can offer several benefits in an estate plan including tax advantages, the ability to control your wealth, and avoiding the probate process, which allows assets to remain private.  We encourage you to work with your financial advisor and estate planning attorney to discuss which type or types of trusts will help you meet your goals and the advantages and disadvantages each trust may provide.

Lifetime Gifting

Giving gifts to family, friends, or charities throughout your life can reduce your current tax liability as well as your future estate tax liability. In 2021, you can give away up to $15,000 per recipient tax free without using any of your estate tax exemption, and the value of the gift is removed from your taxable estate. In 2021, the lifetime gifting exemption is $11.7 million per person, however, that exemption amount is set to expire after 2025.

If you have assets in excess of the current exemption amount and have remaining gifting exemption, you may want to ask your attorney for a review of your existing estate plans, in consideration of whether to gift assets while the exemption remains at a favorable level.

You may benefit from lifetime gifting if:

  • You have assets well over the current $11.7 million per person exemption
  • You have sufficient assets for the remainder of your expected lifetime
  • You are concerned the lifetime gifting exemption may fall sharply from existing levels
  • You are reasonably confident that gift recipients would not be adversely impacted by the gift

When gifting, there are potential tax implications for the recipient to consider. When you make a gift while alive, the recipient receives the same tax basis in the asset that you had when you made the gift. If you had left the gift to the recipient upon your death, he or she would receive a step-up in basis in the asset. Your financial advisor can help you determine the best strategy for you.

Charitable Giving

Donating money or other assets to charitable organizations not only benefit the organization and its mission, but it also can reduce your estate or gift tax liability. There are several ways you can give to a charity and receive a tax benefit, including through lifetime gifting as mentioned above. Donor-advised funds are another option that can offer more tax benefits as compared to donating straight to the organization or through a private foundation.

Another option you can consider is accelerating or “bunching” your charitable giving. With this method, you maximize itemized deductions in a single tax year while taking the standard deduction in subsequent years. This results in a greater tax deduction over a period of time.

We Can Help Examine Tax Strategies for You

This article is just a brief look into tax strategies you can use to minimize your tax liability as you head into retirement. The tax code is quite nuanced and complicated, so your financial advisor can help to ensure you employ strategies that provide the greatest benefits to you and your gift recipients while reducing your future estate taxes. Taking steps today to evaluate your estate plan means you can protect and preserve your wealth in your retirement and for generations to come.

The team at C.W. O’Conner Wealth Advisors works with business owners and their families and can help with ownership transactions, liquidity events and buy/sell agreements, as well as other business advisory services. Call us directly at 770-368-9919 or email Cliff at [email protected] or Kevin at [email protected] to learn more.