Federal Estate Tax Planning Alert for UTBF Clients

Dear Friends and Clients:

With the 2020 Presidential and Congressional elections closing in, we wanted to reach out to you with some important and time sensitive information about possible negative estate tax changes AND challenges, as well as possible planning opportunities.

In fact, many of you have asked us about the impact that presidential and congressional elections may have on your wills, trusts, estate, tax, and asset protection planning for your heirs.

Specifically, many of you have heard predictions that a significant electoral victory by the Democratic Party may lead to the curtailment of the temporarily increased estate, gift and generation-skipping transfer (GST) tax exemption amounts (which would effectively result in many more estates being taxed).

Although it is impossible for us to predict the outcome of the elections, the specific   changes to the law, or the effective date(s) of those changes, we have some campaign statements by the various candidates and parties and can tell you our general thoughts about potential results, dangers, and planning opportunities.

 

Potential Reduction Of The Estate Tax Exemption

And Increased Estate Tax Rates Are A Real Possibility

 

 

 

Since 2017 the Federal gift, estate, and GST tax exemption amounts increased dramatically and are currently $11,580,000 per person (each spouse of a married couple). They are also indexed for inflation annually going forward. However, the current exemption amounts are set, by law, to automatically "revert back" in 2026 to the lower, pre-2017 exemption amounts ($5,000,000 each, but indexed for inflation from 2011).

However, a new Congress and President could accelerate the reduction of the increased exemption amounts (or possibly reduce them even further). Some commentators believe that such reductions in the exemption amounts, even if passed in the middle or later part of 2021, could be implemented "retroactively" to be effective as of January 1, 2021. Therefore, clients who, due to the size of their estates, are relatively certain that their estates will pay federal estate tax if the exemption amounts are reduced (basically, estates of over $5 million dollars and almost definitely estates of over $10 million dollars), may wish to consider gifting options designed to "lock in" the benefit of the temporarily increased and potentially expiring exemption amounts.

 

How To Take Advantage Of Currently Higher Exemption Amounts

     Gifting to utilize the current very large exemption can take a variety of forms - outright gifts to descendants, gifts in trusts for descendants, or gifts into trusts that can benefit both the spouse and descendants - just to name a few.

One option for gifting to take advantage of the currently higher exemption amounts, applicable to married couples, would be to create a so-called spousal limited access trust ("SLAT"). A SLAT is a trust that one spouse creates, making the other spouse a permissible beneficiary during the beneficiary-spouse's lifetime, which creates planning flexibility. 

Just to make this a little more confusing and complicated, generally, any assets that are given away during life will maintain the donor's income tax basis and, absent additional planning will not, therefore, receive a step-up in basis upon the donor's death. By comparison, assets that pass at death will receive a step-up in basis at the owner's death. Given this, it is usually better to use cash or assets with high income tax cost basis for lifetime gifts. It is also beneficial to make lifetime gifts with assets that are expected to appreciate significantly, in order to shift the appreciation out of the donor's taxable estate.

As you can see, for those of you with larger estates, getting good death tax and income tax advice is essential to making informed choices.  And, we are here for you and will work directly with you and your other financial advisors and tax accountants.

 

Why Planning Now Is Better Than At Year-End

We are reaching out to clients now, rather than later and closer to the time, because substantial political change following the November elections may lead many clients to rush to engage in gift planning at the end of 2020.

But, given that there may only be a short time for such planning, the ability to complete it may be limited. In fact, the demand for changes in 2012 when a reduction was expected, was so great that it was not possible for many people to accomplish their desired changes.

Although the UTBF estate and wealth preservation team will be ready and able to assist with any such year-end planning, there are a number of important reasons to begin the planning process sooner, rather than at the end of the year and after the elections. And, we might add that we are still working on solving client problems created by the SECURE act and the pandemic.

First, gifting and establishing trusts and other planning mechanisms take time.  In addition, they also sometimes require appraisals of the assets being transferred and discussion of various tax and nontax consequences with multiple advisers. For example, the transfer of real estate necessitates the preparation and recording of a new deed.

Also, we believe that with the benefit of more lead time, clients and their advisors will be able to give more careful thought and consideration to the gift plan to ensure that the gift not only makes use of the increased exemption amounts, but also, and more importantly, actually creates a structure that achieves the clients' long-term wealth transfer and legacy goals.

In addition, in order to ensure that the favorable 2020 laws apply, such gifts must be completed before the end of the year. From a practical perspective, many banks and financial institutions can take several days or weeks to open bank or brokerage accounts for irrevocable trusts in the best of circumstances. Delays and difficulties should be anticipated in light of COVID-19 related closures and complexities. If a gift plan is implemented too late in the year, then the bank or brokerage accounts may not be open before the end of the year to receive the gift transfers from the donors.

 For all of these reasons, many clients have found a "be prepared” approach to be attractive.

Under that approach, a client would create a trust "now" and open a trust account with a nominal amount so that the gifting structure is established and available at such time that the client is ready to make gifts.

Later on, but before the end of the year, you could then decide whether to make significant gifts to the trust. On the other hand, if you later choose not to make a gift, then the trust that was previously established can simply be terminated.  

 

Why Gifting May Make Sense Even If The Law Doesn’t Change In 2020/21

Whether or not the gift and estate tax laws change in the short term (whether in 2021 or 2026, or sometime in between), taking advantage of gifting is often beneficial for a variety of reasons.  First, gifting an asset outright or in trust, removes post-gift income from, and appreciation on, the gifted assets from the donor's taxable estate.

When coupled with other planning techniques, including, for example, valuation discounts, the use of generation-skipping transfer tax exemption, low-interest rate loans and the use of so-called "grantor trusts" and "GRATs," the potential benefits of a gift program have been and should continue to be considered as part of your estate planning.

Many of these techniques can also be used to protect heirs from divorce and other creditor and litigation risks.

Note, however, that in smaller estates where long term care costs are a factor, that gifting can disqualify a spouse or surviving spouse from Medicaid (long term care).  Make sure to get advice concerning the structure of any gifting plan to avoid unintended taxes or consequences.

 In conclusion, if you are considering a plan to take advantage of the currently higher exemption amounts before the end of 2020, or if you would like to discuss the potential impact of a change in the estate, gift and GST tax laws on your personal estate planning, we encourage you to reach out to your UTBF estate planning attorneys, Dave Frees and Doug Kaune, while appointments are still available for year-end planning.

Also watch your email and mail for invitations to our year end planning teleconference.  It is free for existing clients.

Dave and Doug can be reached at 610-933-8069.

 

David M. Frees, III
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