Are You Leaving a Legacy or a Tax Burden? 6 Estate Planning Strategies

Are You Leaving a Legacy or a Tax Burden? 6 Estate Planning Strategies

Even the best intentions can be derailed by taxes.

When planning your retirement tax strategy, many people forget to take it a step further, addressing their estate plans as well. Next generation wealth planning is important, because a few oversights can turn your legacy into a ticking time bomb of tax burden for your heirs if not done correctly.

As the first Certified Financial Planner (CFP) CPA in Sonoma County, at Montgomery Taylor Wealth Management in Santa Rosa, CA, taxes are a top priority. In our almost 20 years of helping families plan for the future, there are 6 strategies you may want to consider.



1. Take Advantage of a Roth Conversion

Retirement accounts in general are tax-advantaged. Traditional accounts specifically offer tax benefits in the year you make contributions. While this can make a huge impact on your current tax bracket and take-home money, it may not help when passing down your wealth. One way to lessen the tax burden on your heirs is by doing a Roth conversion, transferring the money in your Traditional, pre-tax account to a Roth account.

Roth IRAs are considered after-tax accounts, meaning the taxes have already been paid when the contributions are made. Therefore, when money is later withdrawn from a Roth IRA (including years of investment gains), it is tax-free under current tax laws.

You’ll pay the taxes in the year you complete the conversion, but your beneficiaries will be able to make withdrawals (both mandatory and voluntary) tax-free if the Roth account is more than five years old. This is significant tax savings for your beneficiaries.

Many high net worth individuals aren’t eligible to open a Roth account. The income limit to contribute to a Roth IRA is $124,000 for individuals, and $196,000 for married couples. If your income level reaches or surpasses this amount, you don’t qualify for a Roth account, but a backdoor Roth conversion is a potential work-around.

While a Roth conversion can save your heirs a lot of money in taxes, there are drawbacks to consider. Discuss your situation with a financial advisor to see if a conversion makes sense for you.


Is a Roth conversion right for you? Discuss your situation with the financial advisors at Montgomery Taylor Wealth Management to see how we can help.


2. Open a Trust

Assets held in a trust are not considered part of your estate, meaning that probate, and probate fees, are completely avoided. Additionally, if you open an irrevocable trust (where all the assets are surrendered), beneficiaries will pay taxes on new income generated by the trust but not portions of the trust’s principal.

Again, there are important considerations and decisions to be made when opening a trust, so talk to a financial advisor who understands the effects taxes will have on your plans.

3. Plan for State Taxes

When planning for potential taxes, it’s important to leave no stone unturned. With this in mind, don’t forget about state taxes as you build your legacy.

There are six states that assess an inheritance tax at this time: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. Each state has its own tax rules on inheritances, with progressive tax rates and potential exemptions. If possible, discuss the potential state tax ramifications with your beneficiaries, so they won’t be blindsided with a hefty tax bill upon your passing.

4. Make Tax-Exempt and Tax-Deductible Gifts During Your Lifetime

Many financial gifts are tax-exempt, such as gifts to your spouse, tuition expenses paid directly to an institution and healthcare expenses paid directly to a facility. Donations given to a charity, on the other hand, are tax-deductible.

Financial gifts become taxable once they exceed $15,000 for one individual. Once a gift reaches this amount, you (the donor) are likely responsible for taxes.

5. Make Education and Healthcare Gifts Separately in Specific Tax-Deductible Accounts

Depending on the type of support you plan to leave your heirs, there are account types that may work better in your estate plan, each equipped with special tax treatment. Not only can the dollars put in these accounts be deducted from your taxable income, but withdrawals (with investment gains) can be made tax-free for specific expenses.

For example, a 529 account can be a great tool for saving for college. These unique accounts enable you to save (and invest) money for a beneficiary’s education. When it’s time to send your beneficiary to college, the withdrawals are tax-free, as long as the money is used for a qualified education expense. For more on how these plans work, read our recent blog post: Financial Tip: Opening an Account for Your Child.

On the healthcare front, contributions to a Health Savings Account (HSA) can be tax-deductible, and any withdrawals for qualified medical expenses can also take place tax-free.

If you use these account types to your advantage, you can save yourself (and your beneficiaries) future headaches by avoiding the need to potentially sell investments or trigger a taxable event.

6. Avoid Probate by Planning Early

The probate process can be slow, nerve-racking and unnecessarily costly. Luckily, prudent financial planning can eliminate the need for probate entirely. Work with a financial advisor to form a comprehensive plan that encompasses your investments, insurance and next generation wealth planning. Make sure that all of your retirement accounts, insurance policies, bank accounts and other financial instruments have either individuals or an entity named as the beneficiary.

How We Can Help

At Montgomery Taylor Wealth Management, we believe that effective succession planning is a blend of financial planning, tax planning and legal planning. With a long list of important considerations, working with a financial advisor can help ensure you don’t miss an important step.


Planning your retirement tax strategy can be complicated. Why wouldn’t you want help? Schedule a no-obligation conversation with the team at Montgomery Taylor Wealth Management to see how we can help.

Montgomery Taylor Realistic Financial Planning