Leaving Your Assets Tax Advantaged and Tax Free: Estate and Legacy Planning Part 4 of 6

In this episode of Protecting and Preserving Wealth, we continue our estate and legacy planning series, focusing on strategies to leave assets in a tax-advantaged or tax-free manner. Bruce Hosler, Alex Koury, and Jason Hosler from Hosler Wealth Management join Jon Gay to break down key approaches to optimizing wealth transfer while minimizing tax burdens.

We start by distinguishing between tax-advantaged and tax-free assets. Tax-advantaged assets, like traditional retirement accounts (IRAs, 401(k)s, and 403(b)s), allow for tax-deferred growth but are taxed as ordinary income upon withdrawal. This can result in higher tax rates, especially when withdrawals are made in retirement. On the other hand, tax-free assets—such as Roth IRAs—offer significant advantages by eliminating federal, state, and capital gains taxes on withdrawals. However, certain investments, like municipal bonds, can impact Social Security taxation despite their tax-free status.

One way to convert taxable assets into tax-advantaged assets is through tax-deferred annuities. These allow for capital gains deferral, meaning taxes are only due upon withdrawal. Moreover, these tax-deferred annuities can continue to provide tax advantages even after the original account holder passes away. To transition tax-deferred accounts into tax-free assets, Roth conversions are a powerful strategy. By paying taxes upfront, investors secure tax-free growth and withdrawals for themselves and their heirs. Additionally, life insurance retirement plans (LIRPs) provide another alternative, allowing for tax-free income during retirement and tax-free wealth transfer to beneficiaries.

We also cover the importance of the step-up in basis, a tax rule that can eliminate capital gains taxes for heirs on inherited assets, particularly real estate. Real estate investors can also take advantage of 1031 exchanges to defer capital gains taxes while maintaining income-generating properties. Given Arizona's community property laws, properly titling assets in a revocable living trust ensures maximum tax benefits for surviving spouses and heirs.

Beneficiary designations are another crucial element of estate planning. Regardless of what is stated in a will, financial institutions usually honor the beneficiary designations on accounts like IRAs, 401(k)s, annuities, and life insurance policies. Properly structuring these designations, as well as using pay-on-death (POD) and transfer-on-death (TOD) instructions for bank and brokerage accounts, helps avoid probate and ensures a smooth wealth transfer.

We wrap up by emphasizing the importance of reviewing estate plans regularly to ensure they align with current tax laws and personal financial goals. If you're looking to optimize your estate and legacy planning, reach out to the Hosler Wealth Management team for expert guidance. Stay tuned for part five, where we’ll discuss charitable giving and legacy planning strategies.

*A life insurance retirement plan (LIRP) is a strategy that uses the cash value of a permanent life insurance policy to hold retirement assets. The policy must be properly structured and managed to avoid becoming modified endowment contracts; distributions from modified endowment contracts are subject to tax rules and penalties similar to non-qualified annuities. In addition, withdrawals, and loans plus interest on them, lower both the cash value and the death benefit.

For more information about anything related to your finances, contact Bruce Hosler and the team at Hosler Wealth Management: Visit them online at https://www.hoslerwm.com/

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