Have you started thinking about your year-end tax planning yet? Don’t worry; most people aren’t. One area that can require lengthy and careful planning are estates and gifts, and that’s why we recommend looking at your options early. The Tax Cuts and Jobs Act increased the estate and gift tax exemption beginning in 2018 to $11.18 million ($22.36 million if you’re married). Every year until 2026, that amount is increased for inflation; after 2026, the exemption will be cut in half, unless it’s permanently extended.
That leaves some taxpayers with a lot of uncertainty about estate planning. What should you do now regarding estate and gift tax planning that could save you money before year-end? That depends on you. Read on for suggestions based on your current situation.
If you expect that the total value of your estate will be less than $5.5 million (or $11 million) in eight years, you may not need to do much in the way of creative tax planning. This doesn’t mean doing nothing, however. Review your documents, plans, policies, and provisions like beneficiary designations to ensure everything is updated and in line with current tax law. You may find that old life insurance policies or irrevocable trusts need modified or possibly eliminated.
Further, depending on your home state, you may not need to worry about state estate tax. Some states are increasing or eliminating their estate tax, especially ones with high income taxes. Check with your CPA.
If you expect that the total value of your estate will be between $5.5 – $11 million ($11 – $22 million for married taxpayers) after 2026, then advance planning is critical. While you may not be subject to taxes now, in eight years it will be a different story. In this case, it’s recommended to use the time between now and 2025 to make gifts under the increased exemption. This means laying out most of your estate plan now so that over the next several years, you and your spouse can take advantage of the full $22.36 million gift exemption.
To do this, you may want to establish a trust, from which there are many to choose. There are two main categories of trusts: revocable and irrevocable. Revocable trusts are kept in your name while you’re alive; they’re flexible but could also be subject to estate taxes. Irrevocable trusts transfer assets out of your name (and estate), are less flexible, and trust assets are generally not subject to estate tax. Trusts have benefits in long-term estate planning, like avoiding probate, increased privacy, and scheduled disbursements.
In this case, your year-end estate and gift planning discussion should focus on what you can start doing now to achieve long-term goals in light of the uncertainty of the exemptions after 2026.
Finally, high-net-worth taxpayers and their spouses who would be subject to estate and gift taxes regardless of the exemption amount should use this time to plan large gifts and take advantage of the full exemption. A considerable amount of money can be saved with the current exemption amount; don’t waste it! Careful planning is needed to ensure any money transferred to a trust or gifted to an individual or organization is done with long-term goals in mind. For example,
Additionally, high-net-worth taxpayers should ensure their estate and gift plans protect inheritances, avoid probate, and have the right trustees in place for irrevocable trusts.
Something that any taxpayer can do to minimize his or her taxable estate is take full advantage of the annual gift tax exemption. In 2018, you can give $15,000 ($30,000 if you’re married) without filing a gift tax return. Note that this could reduce your lifetime gift exemption, so do so under the counsel of a qualified CPA or financial advisor.
Why bother with an estate plan if you won’t be subject to estate taxes? For one, when you die your assets won’t pass through probate court. This means your heirs will receive disbursements faster, with fewer taxes, and without additional claims to the estate; no one can contest the assets in a trust, unlike a will. Second, if you own a business, estate planning is a must if you intend to pass the business or its assets to a family member. Thus, even taxpayers without substantial assets can still benefit from estate planning.
Your CPA can work with your financial advisor – or help you choose one – to accomplish your estate planning goals. Contact Naden/Lean if you have questions or want to get started.