Publication

September 11, 2020Client Alert

Estate Planning Before Year End

Political elections can bring quick and significant changes to our tax laws. Prior to the 2016 presidential election, the federal gift and estate tax exemption was $5.45 Million per person. The Tax Cuts and Jobs Act of 2017 increased the gift and estate tax exemption, and as a result, for 2020, the exemption is $11.58 Million per person. This higher level of exemption is scheduled to sunset back to $5 Million, adjusted for inflation, on January 1, 2026.

Depending on the political outcome of the 2020 elections, tax law changes could be passed as early as 2021 that impact tax provisions, including the gift and estate tax exemption. Democratic Presidential nominee Joe Biden has released a tax plan that includes the following estate and gift tax proposals:

  • Lower the $11.58 Million gift and estate tax exemption, potentially to $5 Million or $3.5 Million
  • Increase in the estate tax rate, which is currently a 40% rate
  • Eliminate stepped-up basis at death (currently an individual’s basis, which is the original investment in the asset, steps up or down to fair market value at death, which means the capital gain or loss is eliminated)

What does this mean for you? Any single individual with an anticipated gross estate in excess of $3.5 Million and married couples with a combined anticipated gross estate in excess of $7 Million may want to consider estate planning techniques to take advantage of the higher gift and estate tax exemptions that are currently in place. Some techniques to consider include the following: 

Spousal Lifetime Access Trust (SLAT). A SLAT is an irrevocable trust created by one spouse who gifts assets to such trust for the benefit of the other spouse (the beneficiary spouse). A SLAT is designed to allow the beneficiary spouse to receive distributions from the trust, while at the same time, the assets in the trust, including appreciation on those assets, are excluded from the beneficiary spouse’s gross estate and not subject to estate tax when the beneficiary spouse dies.     

Grantor Retained Annuity Trust (GRAT). A GRAT involves the transfer of assets to an irrevocable trust with the individual who created the trust retaining a stream of annuity payments from the GRAT for a set term of years (minimum term is 2 years). At the end of the term, the assets remaining in the GRAT are distributed to the trust beneficiaries. This is a great technique to consider currently as the effectiveness of using GRATs increases when interest rates are low.

Sale to Intentionally Defective Grantor Trust (IDGT). This technique starts with an initial seed gift to the IDGT (generally 10% of the value of the property to be sold to the IDGT), followed by a subsequent sale of assets to the IDGT in return for a promissory note with interest payable. The IDGT is designed to exclude the trust assets from the estate of the individual who created the trust, but it is “defective” for income tax purposes so that income will be taxed to the individual creating the trust. This technique is a way to give beneficiaries the benefit of the appreciation on the trust assets. If the IDGT is structured properly to take advantage of generation skipping transfer tax exemptions, it can continue for the benefit of multiple generations without incurring additional estate, gift, or generation skipping taxes.

Charitable Lead Annuity Trust (CLAT). An option for those charitably inclined is a charitable lead annuity trust (CLAT). This trust is similar to the GRAT, but a charity or charities receive the annuity payments instead of the individual who created the trust. At the end of the charitable lead term, family members can receive assets remaining in the CLAT. If the investment performance of assets in the CLAT beats the IRS assumed rate of return (currently at a historic low), the trust’s investment return above that rate goes to the benefit of the family members who receive the assets at the end of the term of the CLAT.

Gifts to Family Members. While the techniques discussed above are powerful tools to leverage the gift and estate tax exemption, taxpayers shouldn’t underestimate the simplicity and effectiveness of making direct gifts to family members. This could entail transferring assets to them outright, making gifts to irrevocable trusts for their benefit, or forgiving outstanding intrafamily loans.

The above snapshot of estate planning techniques may be beneficial to review prior to year end. If you have been contemplating making lifetime gifts and would like to discuss the opportunities and implications, including taxes, a beneficiary’s ability to be a good steward of your assets, or your ability to retain your standard of living after making gifts, contact one of Michael Best’s Wealth Planning attorneys. We are here to analyze your specific circumstances and help you develop and implement a gift plan that meets your objectives.

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