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Estate planning focus, for many, now on income tax

With the ushering in of a new estate tax regime, the emphasis has been shifting for financial and estate planners and their clients. Whereas the focus for many used to be on strategies for avoiding estate tax, now that the exemption amount is permanently set at over $5 million and the income tax rate is over 43 percent for some, the focus is more no how to avoid income tax.

One of the estate planning techniques being used among the wealthy is to make an intrafamily loan to children in low-income brackets, since the rates for such loans are set pretty loan at present. This allows parents to avoid paying income on a good chunk of money over the life of the loan. This, of course, is just one possible technique among others. 

Another strategy for income tax avoidance is to invest in retirement accounts, particularly Roth IRAs and 401(k) accounts, since a new investment tax that will apply to high income earners will not apply to such accounts. Some wealthy parents are even helping their children to invest in their own retirement accounts.

Even among the wealthy, there is less of a need to make use of trusts to reduce the size of their estate. Couples that previously set up trusts to avoid estate taxes aren’t necessarily ditching the trusts, though, but sometimes keeping them around for different purposes, such as creditor protection. That said, other types of trusts—such as qualified personal residence trusts and credit shelter trust—don’t have the usefulness they used to.

Readers who feel their own estate plan could use an update should not hesitate to do so. As we like to say, estate planning is not a task, but a process, and it never hurts to get a review.

Source: Wall Street Journal, “Estate Plans Shift Focus to Income Taxes,” Arden Dale, September 6, 2013.