It’s Year-End, Have You Reviewed Your Estate Plan?

So, it’s year-end, other than accelerating deductions and deferring income, what else should I be thinking of?

In today’s tax environment, we need to be considering the bigger picture, like asking ourselves when was my estate plan last updated?

The top six things to consider when thinking about estate planning are:

1. Your Will and the Current Tax Law

• Are your beneficiaries current? Check your will, life insurance, retirement and bank accounts.
• Have you named guardians for your children under the age of 18 (or 21 in some states)?
• Has your will been updated to reflect the existing law?
  • In 2019 the Estate tax exemption is now $11.4 million, and the top estate tax rate is 40%.
  • Based on the existing tax law, the Estate tax exemption is due to rise to $11.58 million in 2020, rise incrementally until 2025 and possibly even expire come 1/1/2026 (and revert to approximately $6M) or even be revised come the next election.
  • This means that you can gift up to $11.4M before the end of 2019 (or during your lifetime) tax free.
• Under the portability provision for a married couple, the unused portion of the estate tax exemption of the first spouse to die may be carried over to the estate of the surviving spouse therefore essentially doubling the estate tax exemption to $22.8M.
• With the uncertainty in the upcoming election, there has been some talk about a probable “clawback” should taxpayers take advantage of the current Federal estate/gift tax exemption. The potential “clawback” would have affected taxpayers who passed away during a year with a lower gift tax exemption, who have already made lifetime gifts of the greater amounts. The IRS has put our minds at ease by issuing Final Regulations on November 22, 2019 confirming that taxpayers can make lifetime gifts utilizing the higher estate/gift tax exemptions without the fear that their gifts would be nullified if when they pass – there exists a lower exemption. Taxpayers may have been hesitant to make such large gifts in fear that the increased exemptions would expire or later be deemed null and void.

2. Annual Gifts

• Are you taking advantage of making tax free annual gifts of $15,000 per donee? You may gift up to $15,000 per person per year tax free. These gifts would not reduce your lifetime exclusion. Further, a married couple would be entitled to gift $30,000 per donee (i.e. each spouse may gift up to $15,000). These gifts can be made to family or non-family members and can be made annually. The $15,000 exclusion will remain unchanged until at least the end of 2020. This is an excellent easy way to begin reducing your taxable estate.

3. Wealth Transfer Opportunities

• There are several options available if you’re interested in transferring your wealth onto your beneficiaries, with more sophisticated techniques for taxpayers with significant wealth. Some options to consider:
  • Creating a Family Limited Partnership (FLP) – this is an ideal method to protect assets while transferring assets to family members and removing them from your estate. Family members would act as partners and depending on their level of involvement could act as General Partners or Limited Partners. This enables you to transfer property to your children while still maintaining control over the decision-making and investment distributions. Assets would also be protected from creditor claims and former spouses.
  • Creating an Irrevocable Life Insurance Trust (ILIT) – An ILIT is a living trust that is set up to own a life insurance policy. The trust can purchase the policy directly or you can transfer a policy to the ILIT. Keep in mind that it would be necessary to gift money to the trust every year so the trust can pay the annual insurance premiums. Gift tax returns would then be required to be filed annually to report the cash gifts to the trust. If created within the appropriate timeframe, the life insurance proceeds will not be considered as part of your estate as you will not be deemed the owner of the policy.
  • Other irrevocable trust options include Grantor Retained Annuity Trusts, Qualified Personal Residence Trusts, and Charitable Remainder Trusts. Once you place assets into an irrevocable trust, they are no longer includable in your estate (providing that the assets have been transferred into the trust within certain time limits). If you’re charitably inclined, consider the Charitable Remainder Trust (CRT). Using a CRT enables you to claim a charitable deduction in the year the assets have been transferred to the trust. If you’re considering removing the family home from your estate, considering created a Qualified Personal Residence Trust (QPRT). Another way to reduce your estate is to create a Grantor Retained Annuity Trust (GRAT). A grantor would transfer cash, securities or other assets to the trust, and subsequently receive annuity payouts for a predetermined period. Once this annuity period ends, the remaining value of the trust would pass on to the beneficiaries. GRATs are useful methods of transferring large pools of assets onto the next generation while escaping gift or estate tax.

4. Tuition and Medical Care

• Did you know that direct payments of medical expenses or full-time tuition (if made directly to the institutions) are not considered taxable gifts? If so inclined, you can provide assistance to family members or friends in need.

5. 529 Plan Contributions – Five year bunching

• Consider making a lump sum contribution to your children or grandchildren’s 529 plans. You can make a special election on a 2019 U.S. Gift tax return, gifts up to 5 times the annual gift limit will be tax free and the contributions will get a head start on their growth.

6. Health Care Directives & Financial Powers of Attorney

• Are these documents current? In the event of incapacitation, your designee can act on your behalf as soon as possible if documents have been properly updated and prepared.

Author: Maryann T. Reyes, CPA, PFS | [email protected]