Healthcare crises are the most pressing concern during everyone’s later years. Other difficult circumstances may include the loss of a job, divorce, or theft, or even problems resulting from poor investments. There are tools that can help mitigate the financial impact of these situations, protecting you and your loved ones from the expensive prospects of long-term care, divorce, and creditors. Tools include long-term care insurance, homestead declarations, durable powers of attorney and healthcare proxies, family protection trusts, and irrevocable trusts.

In the years leading up to retirement (and maybe even during retirement), you work hard to build a “nest egg.” Many factors determine whether your retirement savings are sufficient, such as whether you have a pension, the rate of inflation and the buying power of your money, investment returns, your lifespan, and your healthcare needs.

People are living longer than ever. The life expectancy for a man born in 1955 is 78. Women, on average, live five years longer than men. And there’s a 50% chance that a person born in 1955 will live to age 85. In fact, people age 85 and older are the fastest growing demographic in America. For a couple reaching age 65, there’s a one in two chance that one spouse will reach age 94, and a one in four chance that one will reach age 97. Actuaries call this “longevity risk:” the risk that you will outlive your assets. That’s why you need to plan for it; longevity can be expensive.

In cases in which people have become mentally or physically disabled due to illness, injury, or old age, the cost of care can destroy the wealth they spent a lifetime building. According to the Council for Disability Awareness, one in three people will become disabled at some point in their lives. Given that alarming statistic, planning for nursing care is a crucial step in protecting your wealth.

The government will only pay up to a certain point for nursing care; after that, it’s your responsibility, whether you choose to go into a nursing home or prefer to receive care in the comfort of your own home. By planning, you can arrange in advance for whatever outcome you most prefer.

That means planning for the possibility that you will reach age 90 or higher, and need long-term care for some years. (A good rule of thumb for couples is to plan your assets to last you until you are 100.) Naturally, there are situations in which health or family history suggest a shorter life span, in which case your planning should account for that. But in general, when planning for the future, people tend to underestimate their life expectancies by an average of five years.

Money passing from a deceased spouse to the surviving spouse is not taxed. But if that money remained in the surviving spouse’s estate upon his death, it would then be taxed. If the surviving spouse does not need the money, the couple can plan to avoid this by passing enough assets to others (e.g., their children) so that the surviving spouse’s estate remains below $1 million. This strategy works only up to a point; if you give away over $1 million, the estate will owe a tax, anyway.

Alternatively, the surviving spouse may refuse or disclaim some of the money. In that situation, the money, like any other property, would typically pass to the children. This approach may require difficult calculations at a difficult time, which is one reason why most clients opt for the third option: structuring the estate to have assets pass directly into a trust established for the surviving spouse’s benefit. Such a trust would provide income for the surviving spouse during life without the remainder being taxed upon death. Again, this requires advanced planning with trusted counsel.

The $14,000 gift exclusion mentioned above just means that you don’t even have to report gifts on your tax return unless you give away more than $14,000 in a year. But the federal lifetime gift tax only kicks in after you give away over $5.34 million worth of gifts. You should be very proud indeed if you find yourself required to pay the federal gift tax. (In fact, even if you give away no more than $15,000 per year every year, you would have to reach age 356 for this to be a federal tax issue.) So there are situations in which giving away larger gifts reduces your total estate tax by bringing your taxable estate into a lower tax bracket.

Unfortunately, this approach will not help you avoid the estate tax altogether. That’s because, although there is no state gift tax in Massachusetts, lifetime gifts count towards the value of your estate. In the above example, we saw how Michelle could gradually reduce her estate’s value by making smaller gifts over time. If she instead gave one, lump-sum gift of the same amount ($100,001) on her death bed, her estate would remain above the threshold. That’s why this “deathbed gifting” approach is no substitute for good, advanced planning.

There are three alternatives to paying estate taxes, but each requires some planning.

Gifts of up to $14,000 per year are not taxed. Through advanced planning, you can make piecemeal annual transfers of assets to save your loved ones some tax expenses in the long run. For example, assume that Michelle owns a home worth $500,000, and has $250,000 in savings and investments, plus another $250,000 in assets in an IRA. Taking money from her savings investments could be detrimental for Michelle’s financial security. She could, however, transfer an interest in her home to her children in $14,000 annual increments.

Unfortunately, that strategy would not be advisable if the house had significantly appreciated since Michelle bought it due to the lifetime-gift-and-capital-gains tax consequences. Under that circumstance, Michelle could accelerate her IRA withdrawals, instead. But be aware: IRA withdrawals are taxable income.

If there is anything left in the IRA upon her death, those funds passed on to Michelle’s children, and will be taxed based on their respective individual tax rates. If Michelle successfully reduced her estate to under $1 million with this adjustment, around $35,000 in estate taxes would be avoided entirely. (To be fair, we would expect the accelerated distributions to result in some lost earnings in the IRA, but on balance, the result should be a significant savings.) This way, Michelle gets the benefit of spending more of her money during her lifetime while still saving responsibly and ensuring that her heirs are not taxed unnecessarily.

Fortunately, the Massachusetts estate tax is not as high as the federal tax. It starts at.8% for assets over $40,000, and peaks at 16% for assets over $10 million. If the taxable estate is valued at less than $1 million, the tax doesn’t apply, but once that threshold is crossed, the tax applies and begins chipping away at the estate beginning at the $40,000 mark.

One quirk of this type of tax assessment is that some people with estates over the threshold may prefer to divest some of those assets during their lifetimes to avoid the tax on their estates. For example, an estate with taxable assets of $1.2 million would owe approximately $50,000 in taxes. Face with that reality, some people would choose to divest the estate of $200,001, e.g., by making qualifying gifts, to bring the taxable estate under the $1 million threshold.

Estimated Estate Taxes in Massachusetts

Reducing Your Massachusetts Estate Tax Burden
If you are a Massachusetts resident (or couple) with virtually no chance of having an estate worth over $1 million, you can skip ahead to the next section. But if there’s any chance that your estate will be valued at over $1 million, then you should keep reading to learn how to reduce the estate tax burden.

The IRS levies a tax—at a rate of 40% or more—on the right to transfer property upon death. You, or, more accurately, the Administrator of your estate, must detail everything you owned or had a financial interest in at the time of your death. This includes, but is not limited to, cash, securities, real estate, insurance policies, trusts, annuities, business interests, and intellectual property. The fair market value (which is not necessarily the same price you paid) of these things must also be appraised and disclosed. Taken together, these things form your “gross estate.”

Once your gross estate is ascertained, some deductions (and possibly reductions in value) apply. Examples of such deductions are debts (including mortgages), estate administration expenses, and property that passes to a spouse or qualified charity. What remains after such deductions is the “taxable estate.” The value of all “lifetime taxable gifts” (gifts given after 1976), if any, is then added to it and the tax is calculated.

Simple estates containing cash, publicly traded securities, and easily valued property (but not jointly held property), can be handled without filing an estate tax return. If the estate has combined gross assets and prior taxable gifts totaling $5M or more, then an estate tax return is required. As explained in the following section, Massachusetts’ threshold for the estate tax requirement is much lower: $1 million.

A retired couple with a taxable income of $5,000 per month ends up, after federal taxes, with net income of about $4,119. (Massachusetts imposes an additional 5.15% state income tax, leaving only about $3,865 in actual, spendable money.) Once our retired couple pays for routine expenses, such as groceries, utility and phone bills, property taxes, car payments, gasoline, and healthcare costs, that $3,865 is gone. (For this reason, taxing Social Security income can seem especially maddening.)

When planning for retirement, you must factor in taxes. Many economists expect that savers will be penalized in the coming years, because excessive government borrowing and spending (e.g., for military operations, Medicare, and Medicaid) will lead to giant debts (currently over $18 trillion federally, or more than $150,000 per taxpayer) that will be passed down from one generation to the next.

Do not assume you’ll be paying less in taxes when you retire. (Even if you start off paying less, keep in mind that it is possible to migrate into a higher bracket as you withdraw untaxed portions of your retirement portfolio.) Smart planning for retirement, which should be done with a trusted accountant or tax attorney, will help minimize your tax burden.

Taxes is another topic that people don’t like to talk about or plan for.

If you live or work in the United States, you are subject to taxation by the federal government and at least one state government (many local governments also levy an income tax). Here’s the bright side of paying income taxes: you must have made some money if you owe taxes. Now, on to the rest of it.

Throughout life, including during retirement, tax obligations depend upon individual circumstances. Tax laws can be complicated, and they often change significantly from one year to the next. (That’s why it’s important to consult a tax attorney or CPA when developing a comprehensive retirement plan.) For now, it should suffice to say that there are two general categories of taxes relevant here: taxes you pay during your life (income tax), and taxes that are owed after death (estate taxes).

Income taxes are calculated based on your taxable income, which (broadly defined) is your total income minus deductions permitted by the applicable tax code. Individuals may deduct an “exemption” called a personal allowance, and may also deduct certain expenses (e.g., interest on a home mortgage, state taxes, charitable contributions, etc.). (Some expenses are deductible only to a limit.)

Capital gains (e.g. money you’ve made from profitable investments) are taxable, and capital losses (e.g., money you’ve lost on poor investments) are deductible but only to a point. Short-Term Capital Gains (profits from assets held for one year or less) are taxed at the same rate as income (10–39.6% in 2015). Long-Term Capital Gains (profits from assets held for longer than one year) and income from corporate dividends are taxed at a lower rate (generally 15% or 20%, though upper-income investors may pay additional surcharges) than income. The top 25% of wage earners pay about two-thirds of the nation’s taxes.

You self-assess your income tax. (Although this system is widely criticized as inefficient, it’s unlikely to change anytime soon.) The amount you calculate may, of course, be adjusted by the tax authorities if they disagree with you.

One thing that seems counterintuitive but bears noting is that Social Security income is taxable as income. Many people incorrectly assume they will pay lower taxes upon retirement, but, depending on how you’ve saved for retirement and whether you have a pension, you may very well remain in the same tax bracket when you retire that you were in during your working years.

If you’ve had the good fortune, foresight, and diligence to earn a pension, Uncle Sam gets a piece of that too, just as he gets a piece of your dividend payments, interest, and Social Security payments. On top of that, your Individual Retirement Accounts (IRAs) and 401ks may contain taxable assets. Naturally, inheritances are also taxable.

Even if you have a small estate that would be exempt from Massachusetts death taxes (if the estate is worth less than $1,000,000), you may still be forced to go through Living Probate or Death Probate (or both). Proper estate planning cannot only save you on potential estate taxes, it can also help your family avoid the heavy time demands and financial burdens of probate court.