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Think Long-Term Now, Save Millions Later

By Dan Caplinger - Updated Apr 5, 2017 at 8:00PM

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Plan now to make sure you never have to pay this painful tax.

The bear market has destroyed trillions of dollars in wealth. Yet while you've heard plenty about how low stock prices have given you the opportunity of a lifetime to buy stocks, there's another silver lining, too -- one that could save you from having to pay the most punitive tax left on the IRS's books.

Once thought of solely as a tax on the extremely rich, the estate tax now affects many with much more modest wealth. If you're looking to accumulate a big enough retirement nest egg to take care of you and your family for the rest of your lives, you may be surprised to discover that you need to pay attention to the estate tax.

How the estate tax affects you
The taxes you're most familiar with focus on how much income you earn. Yet while most homeowners pay property taxes on their homes, other direct taxes on wealth are relatively rare in the United States.

The estate tax, however, is the largest exception to this rule. Estate taxes look at the value of your assets when you die, and if you own more than a certain amount, you'll pay tax on the excess -- at a whopping 45% rate.

Right now, you may have to pay tax if you own assets worth as little as $2 million. And while many expect the estate tax to go away or that $2 million number to be set higher permanently, that number could fall to $1 million in coming years without action soon.

Assets add up
In today's economy, building up $1 million in retirement savings may sound next to impossible. But consider that the estate tax includes just about everything you own, including:

  • Your home.
  • Your IRAs and employer-sponsored retirement plan accounts.
  • The amount paid to your heirs on life insurance policies you own.

Taking all these into account, tens of thousands of people end up having to file estate tax returns each year -- and almost half of them end up paying tax.

But there's a simple strategy you can use now to avoid losing so much of your hard-earned money to the IRS. By making gifts to your children and grandchildren while markets are low, you can cut your tax liability once stocks rise again.

How to stop the estate tax
The key to estate-tax planning is figuring out how to get your assets to your heirs in the best way possible. Because stock prices are low, making gifts during your lifetime could save you hundreds of thousands in taxes if the market rebounds before you die.

Here's an example. Say you own a portfolio that includes these stocks:

Stock

Value of 3,000 Shares Last Year

Value of 3,000 Shares Today

American Express (NYSE:AXP)

$154,260

$61,020

Boeing (NYSE:BA)

$259,170

$117,600

Dell (NASDAQ:DELL)

$70,710

$34,440

Dow Chemical (NYSE:DOW)

$123,630

$59,130

MasterCard (NYSE:MA)

$647,790

$416,430

Transocean (NYSE:RIG)

$408,000

$170,250

Research In Motion (NASDAQ:RIMM)

$317,940

$116,460

Total

$1,981,500

$975,330

Source: Yahoo! Finance. Figures from Dec. 14, 2007 to Dec. 12, 2008.

You can make up to $1 million in taxable gifts during your lifetime without paying tax. As you can see, that would allow you to give away the entire portfolio of stocks in this table right now. But if you hold onto them until they rebound to last year's levels, they'd be worth more than $1 million more -- costing you hundreds of thousands in additional estate tax. And over time, as your stocks grow further, you could pay millions more in taxes -- taxes you won't pay if you make gifts now.

Of course, as with any tax strategy, there are lots of details. Clearly, you don't want to give away money that you'll need for your own expenses. But you also don't want to hang on to too much if it means your family's money will be lost to taxes. You want to take advantage of estate planning tricks to save.

The Fool's Rule Your Retirement newsletter doesn't shy away from complicated topics, realizing that buried within them is the chance to preserve large portions of your wealth. That's why the final part of our "5 Steps to Ruling Your Retirement" series focuses on estate planning. Foolish expert Robert Brokamp talks you through what you need to know to save thousands from the IRS.

That's just one of the many perks Rule Your Retirement readers get every month. And while Rule Your Retirement requires a subscription, you can take advantage of our 30-day free trial offer to see the “5 Steps” -- along with all the other resources our retirement newsletter offers.

Estate tax isn't unavoidable. And as painful as the bear market has been, it's giving you an opportunity to get out from under a potentially huge tax liability. Taking action now could save your heirs a world of headache -- and a big tax bill.

For more on retirement tricks of the trade, read about:

Fool contributor Dan Caplinger knows exactly what he wants to happen with his estate. He doesn't own shares of the companies mentioned in this article. Dow Chemical is a Motley Fool Income Investor pick. Dell and American Express are Motley Fool Inside Value selections. The Fool owns shares of American Express. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy always thinks long-term.

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Stocks Mentioned

American Express Company Stock Quote
American Express Company
AXP
$163.90 (-0.88%) $-1.45
The Boeing Company Stock Quote
The Boeing Company
BA
$167.20 (-2.84%) $-4.88
Mastercard Incorporated Stock Quote
Mastercard Incorporated
MA
$355.33 (-1.09%) $-3.92
Dell Technologies Inc. Stock Quote
Dell Technologies Inc.
DELL.DL
Transocean Ltd. Stock Quote
Transocean Ltd.
RIG
$3.51 (2.93%) $0.10
BlackBerry Stock Quote
BlackBerry
BB
$6.77 (-3.56%) $0.25
DuPont de Nemours, Inc. Stock Quote
DuPont de Nemours, Inc.
DOW

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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