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DEAR TRUST OFFICER:
I understand that the amount exempt from federal estate and gift tax will drop in half at the end of the year. Any chance that this will not happen?—TAX TARGET
DEAR TARGET:
Predictions are hard, especially about the future, as a great man once said. On the one hand, Congress has never allowed a drop in the exemption amount from federal estate and gift tax to happen. On the other hand, extending the current exemption would seem to benefit “the rich,” so there could be resistance to such an extension.
There is yet another possibility. On February 13, 2025, the Death Tax Repeal Act was introduced by Republicans in the House and Senate, with more than 200 supporters. The bill would entirely eliminate both the federal estate tax and the generation-skipping transfer tax. In the current draft, the federal gift tax would be retained and the current lifetime exclusion extended, so as to limit the opportunity for income shifting within a family. The gift tax rate would fall to 35%. Step-up in basis at death would be retained.
Despite the significant support for repeal in Congress, the prospects for the legislation are very uncertain. It would have to be evaluated in the context of additional tax measures under consideration. Many questions are yet to be resolved, including:
The largest imponderable in repealing the federal estate tax might be projecting what happens if a future Congress decides to bring the estate tax back.
Article ©2025 M.A. Co. All rights reserved. Used with permission.
According to figures available from the U.S. Department of Labor’s (DOL) Employee Benefits Security Administration, only 43.5% of working women participate in a company retirement plan. Part of the explanation may be that women’s employment patterns are different. They are more likely to work in part-time jobs that don’t qualify for retirement plan coverage, or to work fewer years in plan-covered employment because of interruptions in their careers to take care of family members.
It’s a bit ironic because, on average, a female retiring at age 67 can expect to live another 20 years, two years longer than a male retiring at the same age, and, therefore, needs to save more to cover those extra years.
The DOL offers a checklist of items for women to think about and act upon with regard to retirement plans and planning. A summary of its main points:
1. Coverage
If your employer offers a retirement plan, join it as soon as you can and contribute as much as the plan allows. Many employers who provide a 401(k) plan will match a percentage of the employee contribution. As a result, when the match is figured in as part of your investment return, it’s very likely that the rate that you earn will be higher than the rate that you might receive from other investments. Don’t procrastinate. By saving early, you have time on your side. Your savings will grow, and your earnings will compound over time, tax deferred. Only upon withdrawal of your money will you owe tax.
2. Vesting
In many companies you may have to work a specified period of time in order to be eligible to receive benefits. Once you have satisfied the time requirement, your benefits will have “vested,” meaning that you will have worked long enough to earn the right to receive them. Too often, says the DOL, employees, especially women, quit work, transfer to another job or interrupt their work lives just short of the time required to become vested. Ask the personnel office or plan administrator about the vesting period and other details of your company plan.
3. Recordkeeping
In addition to asking questions of company or plan officials, you should keep copies of the summary plan description (SPD) and any amendments. The SPD is a document that plan administrators are required to prepare. It outlines your benefits and how they are calculated. The SPD also spells out the financial consequences—usually a reduction in benefits—if you decide to retire early. You probably received a copy of the SPD when you joined the plan. But, if you can’t locate it in your files, you may request another one. Also remember to keep plan-related records from all jobs. They provide valuable information about your benefit rights, even when you no longer work for a company.
4. Change of employment
You may lose benefits that you have earned if you leave your job before you have vested. However, once vested, you have the right to receive benefits even when you leave your job. In such cases the company may allow, or in certain cases insist, that you take your money in a lump sum when you leave. However, some companies may not permit you to receive your money until retirement (some pension plans, for instance). The time when you can receive your benefits is spelled out in the SPD. A word of caution: If you receive your money in a lump sum, you will owe income tax, and possibly a 10% penalty tax. You avoid the tax and penalty by rolling over your payout from the plan to an IRA. The transfer of the money should be direct from the plan to IRA in order to avoid a 20% withholding tax.
5. Alternative retirement plans
You don’t have to work for a company that offers a retirement plan to get the benefits of tax-deferred savings. Anyone receiving compensation, or married to someone receiving compensation, can contribute to an IRA. In addition, if you are self-employed, you can start a Simplified Employee Pension (SEP) or a Savings Incentive Match Plan for Employees of Small Employers (SIMPLE). As with other retirement savings plans, there may be tax consequences, and possibly penalties, if you withdraw your savings early.
6. Social Security
More women than ever work, pay Social Security taxes, and earn credit toward a monthly income for their retirement. These earnings can mean some income for you and your family in the form of monthly benefits if you become disabled and can no longer work. If you die, your survivors may be eligible for benefits. In addition, you may be eligible for Social Security benefits through your husband’s work and can receive benefits when he retires or if he becomes disabled or dies. Special rules apply if both you and your husband have been employed and both have paid into Social Security. Special rules apply also if you are divorced, or if you have a government pension.
7. Divorce
As part of a divorce or legal separation, you may be able to obtain rights to a portion of your spouse’s retirement benefits (or the spouse may be able to obtain a portion of yours). In most private-sector plans, this is accomplished with a qualified domestic relations order (QDRO) issued by a court. You or your attorney should consult your spouse’s plan administrator to determine what requirements the QDRO must meet.
8. Death
Are you aware of the rules that govern your plan and the plan of your spouse if either of you dies? The rules vary based upon the type of employer plan. If you or your spouse belong to a defined benefit (pension) plan, the survivor may be entitled to receive a survivor benefit when the enrolled employee dies. This survivor benefit is automatic unless both spouses agree, in writing, to forfeit the benefit. You will need to check the SPD or consult with the plan administrator regarding survivor annuities or other death benefits. The rules may be different if you or your spouse participate in a defined contribution plan [a 401(k) plan, for example]. Again, consult the plan administrator for details about your rights.
Article ©2025 M.A. Co. All rights reserved. Used with permission.
Wife is the beneficiary of a substantial Qualified Terminable Interest Property Trust (or QTIP trust for short). Her six children were remainder beneficiaries, and she received all of the trust income. Perhaps motivated by the children’s impatience for their inheritance, Wife proposed to divide the trust into three new trusts. Trust 1 will be identical in every way to the existing QTIP trust. Trust 2 will become a total return unitrust, in accordance with local law, which allows such transformation with the consent of the beneficiaries. Wife will receive from 3% to 5% of the value of the trust each year, valued annually. Trust 3 will be terminated immediately after creation, and the assets in that trust then will pass to the remaindermen. Wife will treat that termination as a taxable gift from her to the children, but the children will pay any gift taxes due. That fact will, in turn, reduce the value of the taxable gift and the final cost of the tax.
Wife turned to the IRS for confirmation that there aren’t any tax problems with this plan. There are not, the Service confirmed in private advice. The division of the trust into three trusts will not be considered a gift and will not impair the QTIP status. The termination of Trust 3 will be a taxable gift, and, therefore, those assets will not be included in Wife’s estate. The conversion of Trust 2 to a unitrust will not be a gift to anyone, and it will not require recognition of gain or loss.
QTIP trusts generally are considered unchangeable, but this case demonstrates that even irrevocable trusts may be modified to meet the changing needs of beneficiaries.
Article ©2025 M.A. Co. All rights reserved. Used with permission.
Is this something to be considered early in retirement?
IRAs have become a very important element of retirement security. The Individual Retirement Account was added to the tax code in 1974, along with the ERISA overhaul of retirement plan regulation. Contributions may deductible, depending upon the taxpayer's income, and distributions are taxable as ordinary income. The Roth IRA became available in 1998. No deductions for contributions, but if all conditions are met all the distributions from a Roth IRA during retirement are tax free.
Some 58 million households owned an IRA as of year-end 2024, more than 40% of households. However, about 88% of IRA assets are held in traditional IRAs, over $14 trillion.The reason for the disparity is that traditional IRAs have been used, through a rollover of the funds, to preserve the tax deferral for distributions from 401(k) plans and other qualified retirement plans. The contribution limit for such plans is far higher than the limits for IRAs.
The Roth conversion option
A traditional IRA may, at the option of the account owner, be converted to a Roth IRA. There are no income restrictions on who may exercise the conversion option. However, there is a price to be paid, as the entire amount of the conversion must be included in ordinary income.
For larger IRAs, that can be an intimidating tax bill. But when one works through the math, conversion to a Roth may be a very good idea, especially early in retirement.
The optimum conditions are that the taxpayer no longer has wage income, has not yet started Social Security benefits, and has other financial resources to draw upon to meet expenses, such as an after-tax investment portfolio. In that situation the cost of conversion to a Roth IRA may be relatively low.
As one moves up the income brackets, the tax bill may begin to seem less like a bargain.
Big benefits
There are three benefits offered by the Roth IRA to take into account.
Planning flexibility. Minimum annual distributions are required from traditional IRAs once the owner reaches age 73. There are no such requirements for Roth IRAs. The required minimum distributions are not large in the early years on a percentage basis, but the only way to avoid them is to arrange for a distribution to charity (limited to $100,000 per year).
Tax freedom. After five years, distributions from the Roth IRA during retirement are not included in income. The income taxes have effectively been pre-paid.
Lower taxes on Social Security benefits. Those required minimum distributions from traditional IRAs may have the side effect of increasing the taxes the retiree must pay on Social Security benefits received. Singles with adjusted gross incomes below $25,000 and married couples below $32,000 do not have to worry about taxes on benefits. For singles with AGI from $25,000 to $34,000, up to 50% of their benefits will be taxed, and above $34,000 up to 85% will be taxed. For married couples, the 50% inclusion bracket is $32,000 to $44,000, and 85% above $44,000.
Unlike many other elements of the tax code, these boundaries have never been adjusted for inflation. Thus, more and more Social Security benefits are being subject to income taxation as the years go by.
What is best for you?
Conversion of a traditional IRA to a Roth IRA is a major life decision, definitely worth paying for professional advice before undertaking. The decision must be put into the context of the taxpayer's total resources and wealth management objectives.
The tax consequences of a conversion may be softened by doing partial conversions over time. It’s not an all-or-nothing decision. The conversion might be handled at 20% per year for five years, for example. Or a larger share might be converted in a year when one’s income is low, putting the transaction in a lower tax bracket.
We can be of service
Helping retirees manage their retirement income is among our core services. We manage investment portfolios as well as large IRAs and Roth IRAs. Looking for lifetime financial security? Call upon our professionals soon for a consultation.
Article ©2025 M.A. Co. All rights reserved. Used with permission.
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