The federal lifetime gift and estate exemption stands at $11.58 million per person for 2020, but is set to revert to a base level of $5 million, plus inflation adjustments, in 2026. Last November, the Internal Revenue Service (IRS) issued final regulations clarifying that taxpayers who took advantage of the increased exemption amount (tied to the Tax Cuts and Jobs Act – TCJA) would not be subject to a future ‘clawback’ should the exemption decrease. Per the IRS news release, “individuals planning to make large gifts between 2018 and 2025 can do so without concern that they will lose the tax benefit of the higher exclusion level once it decreases after 2025.”
The possibility exists that the exemption amount could change prior to 2026 as Democratic presidential candidate Joe Biden’s tax plan could undo the TCJA changes sooner. Individuals likely to have a taxable estate and are in a position to make gifts should consider whether to gift assets while the exemption remains at a favorable level.
The sudden economic downturn brought on by COVID-19 has decreased the value of many investments and other assets, including closely-held businesses. These depressed values, along with lower interest rates and additional estate and gift tax exemptions, present numerous estate planning opportunities for people with more complex estates. The CARES Act and related government spending are likely to result in higher income and estate taxes in the near future no matter the results of the November elections.
It is an appropriate time to consider succession planning for business interests, wealth transfers of investments and other assets that are likely to appreciate in the future outside of your estate. Establishing a grantor-retained annuity trust (GRAT) and other trusts, capital gains or loss harvesting, Roth IRA conversions and other income acceleration possibilities should be reviewed. Attention to our personal estate may also help alleviate some of the uncertainty our families are currently experiencing.
Given the low interest rate environment, high-net-worth individuals may be able to take advantage of certain estate planning strategies.
For example, GRATs allow for the transfer of assets that grow above the statutory IRS rate at a discounted gift and estate tax cost. The IRS Section 7520 rate stands at a meager 0.4% for October. Assets placed in a newly-formed GRAT which grow above that rate of the trust’s term will ultimately transfer to the trust’s designated beneficiaries, thus representing a potentially significant estate planning opportunity.
As another example, properly structured intra-family loans can take advantage of low interest rates. The October applicable federal rate for a mid-term loan (more than three years, but less than nine years) stood at just 0.38%.
Many states have estate exclusion exemptions far below the federal level. The Massachusetts exemption amount remains at 1 million. Some other examples include Rhode Island at 1.5 million, Vermont at 2.8 million, Maine at 5.7 million, Connecticut at 3.6 million and New York at 5.3 million. Unless structured properly, a spouse’s credit can be lost upon death. Your estate plans should be reviewed to ensure trust provisions incorporate federal and state tax limits. This might include a credit shelter trust.
Also, check that your beneficiaries are listed as you currently intend, specifically on wills and trusts, IRAs, 401(k)s, other retirement plans and life insurance policies. Ensure that certain assets such as residences, other properties and investments are properly titled. This is especially important if you have a revocable or living trust. Make sure your estate planning documents have been updated to reflect the state of your legal domicile. This is critical to ensure your wishes are valid and enforceable after your passing. Note, a legal residence is not necessarily the same as a legal domicile.
Under the current law, each person can make gifts of up to $15,000 per individual per year. When a husband and wife each plan to make a $15,000 gift to a child, we suggest each spouse write a separate check to the child, even if both checks are from a joint account. To complete a gift in a specific year, the check must be written and deposited in that year.
We suggest you consult with your estate planning attorney on these matters. Our office would be happy to participate in these conversations with you and your attorney. If you do not have an attorney, please leverage our network of elite local and national trust and estate attorneys. As always, our talented team of professionals is available to help assist with these matters or any other financial needs that may arise.