End of Year News

We are almost at the end of another year, so it’s a good time for us to highlight some estate planning strategies for you, caution against some common pitfalls and give a preview of possible things to come.

The Estate Tax—The Sky’s The Limit, Or Almost

Most of us, when we hear about ‘estate taxes’ we think of Bill Gates, Jeff Bezos and the Silicon Valley uber-wealthy. And, for the most part we are right. The current estate tax only affects couples with combined assets of around $23,000,000.00. To give you a sense of how few people that affects, last year only about 4,000 estate tax returns were filed and, of those, only about 1,900 resulted in a payment of a tax to the IRS. That means that of the 2,700,000 people that were expected to die in 2018, only about 0.01% of them had to pay estate taxes.

To Give Or Not To Give, That Is The Question

That story though is set to conclude on December 31, 2025. On January 1, 2026 the estate tax is set to revert to $5,000,000 with inflation adjustment (perhaps $5,500,000)—a significant drop. And since we do not have a crystal ball, we cannot tell you who is going to win the next election. Certain Democratic nominees, if elected, will look to lower the estate tax immediately. If that happens, it may be beneficial to utilize the current laws and pass wealth down now. It is a “use or lose it” situation. For example, it may be beneficial to get highly appreciating assets out of your estate now if you think your estate may be subject to taxation. Not only would you reduce your current exposure to estate taxes but you will be removing all of that asset’s growth from your estate as well.

What about the rest of us, though? Does that mean we do not need to think about the tax consequences of our estate planning?

By no means! We often talk to clients who want to gift property to another generation. Perhaps they own a large piece of land, a farm, or a second house. They want to see their children and grandchildren enjoy that property now and take responsibility for it. When they come to see us, however, we urge them to think about the income tax consequences of that transfer. Let me give you one example. Betty and Bill bought a piece of property twenty years ago for $100,000. It is now worth about $600,000. They are contemplating gifting that property to their two children, Cindy and Carl, who each have children. Sounds great. But here is the (tax) rub. If Betty and Bill gift that property now, Cindy and Carl will have a tax basis in that property of only $100,000. If Cindy and Carl later go to sell the property for $600,000, they will have to pay capital gains taxes on $500,000 (the difference between their basis ($100,000) and the sale price ($600,000)). Depending on Carl and Cindy’s tax bracket, that tax could be between $75,000 and $100,000. However, if Betty and Bill hold on to the property and give it to Cindy and Carl after they die, then Cindy and Carl will have what is called a “step-up” basis in the property; their basis will be the fair market value at the time their parents died. And if they turned around and sold it then, they would owe NO capital gains at all. That could be a savings to the kids of $100,000!

As you can see from the above example, the decision as to when to gift is critical. Navigating between the Charybdis of estate taxes and Scylla of income taxes can be difficult. For those with estates that may be subject to estate taxation, it may be beneficial to gift the asset now. On the other hand, for others, it may be beneficial to hold onto the asset in order to give your beneficiaries a “step up” in basis. For some, the tax consequence may not be as important as other familial goals. But, regardless, both should be consulting their attorneys prior to making the transfer. Strauss Attorneys is ready to help.

Some Other Year-End Highlights

What are some other things you should be aware of as we near the close of 2019? Here are a few:Opportunity to Use Low-Interest Rates. The U.S. Treasury’s interest rates applicable to certain estate planning transfers are near all-time historic lows. These rates continue to be favorable for individuals who engage in certain planning techniques that are tied to these measures, such as grantor retained annuity trusts (GRATs), sales to grantor trusts, and intra-family loans. The intra-family loan allows for some transfer of wealth to take place between generations without using up the lender’s lifetime gift tax exemption, which will be at $11.58 million per individual for 2020. For example, the “hurdle” rate for a new GRAT created in November 2019 is 2.0%. Rates applicable to intra-family sales and loans are currently 1.59%-1.94%, depending on the term of the loan. Families with existing intrafamily notes may wish to consider refinancing them at current rates, which are beneficial in a low-interest-rate environment.

Gift Exclusion: This year, you can gift $15,000 without paying gift taxes; for couples, that amount is $30,000.529 Plans: You can consolidate five years of contributions to a 529 Plan, for a total contribution of $75,000, or $150,000 per married couple.

Tuition and Medical Expenses: There is no limit to the payments you make directly to an educational institution without gift tax consequences. For dependents, the same goes for many medical expenses.

IRAs, the Required Minimum Distribution (RMD), and Charitable Giving: If you turn 70 ½ in 2019 you can opt to defer your first required minimum distribution until April 1, 2020; you will have to take your 2020 RMD by December 31, 2020. You can also think about a qualified charitable distribution of your RMD (only up to $100,000) to a charity of your choosing. If you do so, you won’t have to pay income tax on the distribution.

(Potential) Changes Ahead:

Proposed Legislation on IRA Stretch-outs. The U.S. House of Representatives has passed, through bi-partisan support, legislation known as The SECURE Act. This acronym stands for Setting Every Community Up for Retirement Enhancement Act. The legislation is stalled in the U.S. Senate and, despite bipartisan support, it is unknown whether it will be brought to the floor for a vote. Under the House version, The SECURE Act would make it easier for small business owners to set up “safe harbor” retirement plans that are less expensive and easier to administer. Also, many part-time workers would be eligible to participate in an employer retirement plan under the bill. The Act would also push back the age at which retirement plan participants need to take required minimum distributions (RMDs), from 70½ to 72.
In order to pay for a maximum tax credit of $500 per year to employers who create a 401(k) or SIMPLE IRA plan with automatic enrollment, the Act would limit the present stretch-out on inherited retirement plans (for other than a spouse and a few other exempt individuals) to a maximum of 10 years as opposed to the life expectancy of the inheritor. This major change would force retirement plan benefits out of protected trusts unless the trusts are specifically designed as “accumulation” trusts. We recommend that clients of ours that do not have a specially designed “accumulation” trust and are expecting that retirement plan benefits will be controlled by a trust for the inheritor, make an appointment to review those provisions, and possibly modify their documents. Existing Strauss Attorneys clients will not be charged for a brief review meeting to discuss possible retirement plan changes.
These are just a few highlights and are certainly not exhaustive. A lot has happened in the past few years. At Strauss Attorneys, we stand ready to help you navigate your estate planning goals and objectives.