A recent article out of Vending Times took up the important topic of how to avoid passing your wealth on to the IRS. This is a particularly important issue for those who are wealthy, as they have a greater risk of losing their wealth to various forms of taxation. The topic is worth considering even for less wealthy readers who want to maximize their tax savings.
According to Irving Blackman, the author of the article, the top five tax mistakes in estate plans include the following areas: failing to create an appropriate succession plan for corporations; allowing double taxation on qualified retirement plans and IRAs; failing to place investments in a family limited partnership; failing to use take advantage of life insurance as an investment; and not having a comprehensive estate plan.
Succession planning refers to the task of passing on a company to the right people and arranging the transaction in such a way as to achieve one's goals. Companies can hold an enormous amount of assets, and it is important to ensure that they are passed off in such as way as to reduce estate, income, and capital gains tax liability
Another problem is the double taxation of IRAs and qualified retirement plans. When a retiree dies and leaves his or her retirement plan to a spouse, there is no immediate estate tax, but only an income tax on distributions. There will be an estate tax, though, when the spousal beneficiary dies, allowing the IRS to collect twice. The basic approach to avoiding this is to leave as little in the taxable estate as possible and pay the income tax using low tax rates. A variety of approaches are available depending on specific goals.
Another mistake people sometimes make with their estate plan is failing to take advantage of family limited partnerships. We'll pick up with this topic in our next post.
Source: vendingtimes.com, "The Five Biggest Estate Planning Mistakes That Enrich The IRS Instead Of Your Family," Irving Blackman, February 7, 2012.