Elder Law with Frank and Mary: Thinking beyond this tax return


After you scurry around trying to make sure your tax return gets in and your tax bill gets minimized, you may want to take a moment to think about your taxes in the broader scheme of things. Consider talking to a tax professional about what you can do for the rest of the year to make next year, and the rest of your life, better tax-wise. Among other things you may want to consider is rethinking withdrawals from your tax-deferred accounts. Do you really want to minimize these withdrawals, and take only the required minimum distribution (RMD) every year? Of course, that will minimize your taxes this year, but is that your best plan for the future? Consider this:

  • I regularly talk to a spouse whose husband or wife needs to qualify for MassHealth, either to pay for nursing home care or to pay for care at home. Typically, to qualify, the spouse in need needs to transfer all assets to the healthy spouse. This can be done at the last minute, but if the spouse who needs MassHealth has tax-deferred funds, those funds all need to be withdrawn (and the taxes paid) at once, leading to huge tax bills, often at high federal tax rates, just when people can least afford them. You can avoid that problem by withdrawing these funds gradually, a little every year, working with your accountant to make sure you have minimized taxes in the long run.
  • If you leave those funds to your children after you die, they will need to pay taxes on them at their own tax rates, which may very well be higher than yours, especially if they live in higher-tax states like New York and California. If you are leaving these funds to your children in equal shares, you are actually treating them unequally, since those with higher incomes will actually be receiving less after taxes.
  • You can avoid the Massachusetts estate tax by giving assets away before you die. Contrary to popular myth, you will probably not owe any gift tax, no matter the size of the gift. This strategy does not work well, however, if you have to withdraw all your tax-deferred funds at once and pay a huge income tax, just to avoid the estate tax. Once again, you can minimize this problem by taking out your tax-deferred funds gradually.

My point is that now is not the time to figure all this out. Now is the time to get your taxes in. I do, however, suggest talking with a CPA, as they are equipped to advise you about the best approach for the long run. If you want to learn more about these issues, you can watch this month’s episode of “Elder Law 101.” You can find it on MVTV (Comcast 13), or visit Frank and Mary’s YouTube channel, youtube.com/elderlawfrankandmary. If you have any questions, please contact me at 508-860-1470 or abergeron@mirickoconnell.com.

Arthur is an elder law attorney in the trusts and estates group at Mirick O’Connell.