Some of my clients still hold vivid memories of the Great Depression. Other clients have been rattled by the recent market volatility. Both experiences have taught investors how untrustworthy the stock market can be. For instance, I often meet individuals who are heavily invested in traditional savings bonds alone, with the intent to pass these bonds on to heirs. This can be a costly mistake when it comes to estate planning. Here's a very common scenario to illustrate this point:
Greta is an 89-year-old widow who owns several savings bonds. She is in the 15 percent tax bracket. Her children, however, have built additional wealth and success for themselves and are in the higher 25 percent tax bracket.
When Greta's savings bonds pass on to her children and they cash them in, all of the income (let's say it grew 4 percent) will be taxed. Greta's children will pay nearly double the taxes that she would have paid. Instead, Greta could have cashed in the savings bonds and paid the tax in her lower tax bracket. Or she could have invested in tax-free municipal bonds instead.
When you buy and hold even low-risk investments for the purpose of passing those investments on to your children, stop to consider the tax burden you'll be handing them as well. It's the American dream for kids to be more successful than their parents. But that also means that heirs are often subjected to higher taxes as well.
Make sure your investments are wise not only for growth purposes but for tax purposes as well. And consider who may be the best person to bear the tax burden on that growth: you or your beneficiaries.