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Senior Concerns

Important Issues for Clients Approaching or Over Age 70

Estate Planning

Probably the most important issue for people of your generation is having an adequate estate plan. Your plan should provide certainty about who among your heirs will get which assets, and it should also help minimize the federal estate tax hit. Specifically, you probably need an estate tax minimization strategy if your taxable estate will likely exceed $675,000. Don't forget that life insurance proceeds are generally included in your estate for purposes of assessing whether you are over the $675,000 limit. Steps to reduce or minimize the estate tax can include the following:

• For married individuals, setting up a bypass trust to take full advantage of your $675,000 estate tax exemption and your spouse's $675,000 exemption.

• Setting up an irrevocable life insurance trust to own insurance policies on your life. This can keep the insurance proceeds out of your taxable estate. (If you transfer an existing policy to an irrevocable trust, you must survive for at least three years after the transfer. Otherwise, the insurance proceeds may still be included in your taxable estate.)

• Making gifts to your children and grandchildren. You can give away up to $10,000 annually to each donee (gift recipient) without any adverse tax consequences. Married couples can together give away up to $20,000 annually to each donee. And there's a new twist. Starting next year, individuals in the 15% tax bracket will pay only 8% on capital gains from investments held over five years. If you make a gift of appreciated investment securities, your holding period counts for purposes of the five-year rule. So consider giving away appreciated securities you have owned over five years in 2001 to children or grandchildren in the 15% bracket. The gifts will reduce your taxable estate and allow you to avoid any capital gains tax on the appreciated securities. Your donees can then take advantage of the low, low 8% tax rate when the securities are sold.

• There are many other estate tax avoidance strategies - some of which may be appropriate for you depending on your own unique financial situation and family circumstances.

Retirement Account Minimum Required Distributions

Owners of qualified retirement plan accounts, traditional IRAs, and SEPs are required to begin taking annual taxable distributions from these accounts by no later than the year after turning 70½. The so-called minimum required distribution rules exist solely to make sure Uncle Sam gets paid his share of your hard-earned retirement account money sooner rather than later. If you prefer to preserve your retirement account tax deferral benefits for as long as possible (by leaving the accounts untouched), the minimum distribution rules are a big negative. But you can't just ignore them, because there's a 50% penalty if you fail to withdraw at least the minimum required amount each year. The required amount depends on your account balance at the end of the previous year and your remaining life expectancy as set forth in IRS tables.

The good news: You can take steps that make the minimum required distribution rules much easier to live with. Specifically, you should designate a beneficiary for each of your retirement accounts. This allows you to base your required minimum distributions on the joint life expectancy of you and the designated beneficiary. The result is lower required distributions and lower taxes. However, you must designate the beneficiary by no later than April 1 of the year after you turn 70½ if you want to string out your retirement account tax deferral benefits for as long as possible. There are some other tax-saving strategies too. We would welcome the chance to discuss these with you. Because of the aforementioned deadline, time is of the essence.

Long-Term Care Insurance

If you have long-term care insurance coverage, you may not know that qualified policies offer some tax breaks. Your benefit payments are generally nontaxable, and you may be able to deduct at least a portion of the premium payments. Additional tax breaks may be available if you own a business. Once again, we would welcome the chance to explain any long-term care tax-saving strategies that you are eligible for.

Conclusion

Reaching age 70 is a significant milestone that brings certain tax issues to the forefront. This letter explains some of the most important ones. Please give us a call if you have any questions or want more information on any of the topics covered in this letter.