Shying away from some taxes could cost you more in other taxes. For example, an investor who holds onto a stock until death avoids capital gains tax—a savings of 20% of the gains. But if left in an estate that exceeds $675,000 in value, the estate tax will be at least 37%. Therefore, is it worth saving 20% on the gain to potentially be taxed later at 37% or more on the entire amount? If the stock were liquidated during life, rather than left at death, the cash could be removed from the estate more easily and with better tax benefits to heirs. Estate tax could possibly be avoided in total.
Another example of cost you may want to incur to save a larger cost later is the payment of insurance premiums. A 70-year-old couple can purchase an $850,000 life insurance policy for projected total cost of $170,000. The policy will pay their estate taxes of $850,000 when they die. Is it smart to avoid the insurance cost when the taxes later will cost 5 times as much?
What about people who avoid the protection offered by long term care insurance? They understandably shy away from the annual premium of let’s say $2,000. However, with a 48% chance of incurring a bill of $100,000 or more later in life, is saving $2,000 a year worth risking such a large bill later?
Or how about the person who retires and rolls over their company stock into an IRA? They avoid all taxes at that time. Later however, they might pay federal taxes as high as 39.6% when the stock value is withdrawn. However, they could have taken possession of the stock, paid tax on the stock tax basis, and limited future taxes to 20% of the gain.
There may be dozens of ways to avoid large expenditures or large taxes in the future by making small investments today. How can you find out if any of these strategies apply to you? Call and set a time to bring in your tax return for review or check off on the enclosed coupon. In 60 minutes, we can let you know what alternatives would fit for you.
This is a hypothetical example from one insurance company-Jefferson Pilot UL20, 2/18/00
Society of Actuaries Nursing Home Study 1997