In Times of Change, Estate Plan Review Keeps Your Goals on Track

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Gifting Strategy Can Help Address Tax Concerns

By Austin Coyan, CPA, CFE

While reviewing your estate plan at least every five years is generally a good idea, it’s also reasonable to review – and possibly change – your plan when changes in tax law are on the horizon. For taxpayers whose assets exceed the federal exclusion level – $11.7 million for individuals and $23.4 million for couples in 2021 – two events in the foreseeable future make an estate plan review essential.

First, during the 2020 presidential campaign, President-elect Joseph R. Biden Jr. put forth a tax plan that includes changes in federal estate taxes. If those changes are enacted, most taxpayers with assets above the lower exclusion limit will need to revise their estate plans and plan on higher tax rates.

Second, the Tax Cuts and Jobs Act (TCJA) of 2017, which doubled the federal estate tax exclusion limits and indexed them to inflation, returns those limits to pre-TCJA levels in 2026 unless Congress acts to make the higher limits permanent.

It would be better not to have to craft estate plans around a moving target. It is the nature of tax laws to change so no matter when your current estate plan was created it should be revisited sometime in the next year.

As you do this, there are three primary strategies to consider.

#1 - Update Valuations

The first is to simply wait and see what happens with the federal tax law in the next year or two. Even if there are major changes in the estate tax, it is unlikely that the changes would be retroactive. So, if a spouse has died in the past year the provisions of his or her estate will likely remain unchanged.

But wait-and-see doesn’t mean “do nothing.” This is a good time to determine the true value of your assets. If you own a business, obtain an updated business valuation. Likewise, if you own agricultural land or other types of real property, updated valuations are in order. If your assets include personal property such as jewelry, art, collectibles, vehicles, or antiques, you should consider updated appraisals of their fair market value.

Once you have a handle on the value of your estate, sit down with your accountant, your financial advisor, and your attorney to craft an estate plan – or revise one already written – that will accomplish your goals and continue to do so if tax laws change. This is the time to answer important questions: What do you want to do with the assets you have built? Pass them to the next generation, and maybe future generations? Support charitable causes that are important to you and your family?

Your advisors should help you answer these questions and write an estate plan that will fulfill your goals.

#2 - Gifting Strategy

One way to guard against the impact of a future drop in the estate tax exclusion limit is to gift a portion of your estate now or in the near future.

As an individual taxpayer, you can gift up to $11.7 million in fair market value in 2021 with no tax penalty. You would be required to file a gift tax return for the amount above $15,000 (per beneficiary), and the balance would be offset against your estate tax exclusion limit. Consequently, at your death, the entire remaining estate would be subject to tax. But if the exclusion falls back to the $5 million level, neither you nor your estate would have any tax liability on the amount that was gifted with the higher limitation.

This strategy is beneficial for certain taxpayers. For example, if you own stock in a family business that you plan to leave to your children, you can gift it to them now and simply draw a salary from the business to cover living expenses.

A key concern with this strategy is that you must avoid gifting income-producing assets that are necessary to pay for your living expenses.

#3 - Charitable Giving

Charitable giving is an important way to minimize estate taxes, and clients are showing renewed interest in charitable lead trusts. These trusts, often considered the inverse of a charitable remainder trust, enable a taxpayer to establish a trust that provides a stream of income to a charity or multiple charities for a finite period of time, such as 10 to 20 years. After that term is completed, the assets remaining in the trust revert to the taxpayer. During the term of the trust, the taxpayer benefits from both the charitable giving deductions associated with the annual payouts, as well as investment growth. Since the taxpayer retains ultimate possession of the assets, he or she is liable for taxes on any taxable income earned by the trust. Consequently, charitable lead trusts are sometimes invested to earn tax-free income.

Other well-known charitable giving instruments that minimize estate taxes include charitable remainder trusts and donor-advised funds. These can also be discussed with your financial planning team as possible options to meet your individual goals.

Building a charitable giving component into an estate plan not only minimizes tax liability but is an important way for people to leave a legacy. Supporting local charities is appealing to many people who want to give back to their communities and set an example for their families.

Contact your Adams Brown Advisor today to learn more about trust and estate planning.