2020 is a year we will all remember. While we focus on COVID-19 cures and the upcoming holidays, there are a few tried and true estate planning techniques that are easy to implement and can have a substantial economic impact over the long term for you and your family.
The Annual Exclusion
Never underestimate the power of the annual exclusion. Currently, you can give $15,000 to someone without paying any gift tax. If you are married, your spouse can do the same. A typical couple with two children and four grandchildren could gift $180,000 (6 recipients x $15,000 each annual exclusion gift x 2 (each spouse gives their maximum annual exclusion gift). When this type of tax-free giving occurs year-end and year out, the collective amount transferred over time can become significant. Done consistently over a decade, this family would transfer $1,800,000 free of gift and estate tax. Now that’s a tax savings.
The key to using annual exclusion gifts in your estate planning is to use it every year. You don’t have an opportunity to accumulate or carry over any unused amount but you do get a fresh one every January 1 to use for the New Year.
A US citizen/resident also has a lifetime credit they can use if they want to give someone more than an annual exclusion gift. That credit can be used during life or when you die. At a now historical high rate of $11,580,000 per person, it’s uncertain if this high amount of credit will last. It’s currently projected to sunset to a much lower lever, $5,000,000 per person as indexed for inflation, after 2025. With changes in Congress, that could happen even sooner.
If you can afford to use yours before year-end, you can lock in this historical credit amount. In locking in the gift, you also let all future asset appreciation on the gifted assets escape from your taxable estate. Think of this historic high exemption amount as filling a jar from the bottom up. That extra delicious exemption is at the top of the jar. To get to it, you have to use all the lower exemption amounts that sit at the bottom of the jar. Every dollar you use of that extra exemption is future leverage for estate and gift tax transfers of your family wealth. Try to maximize the opportunity by filling the jar to the very top during your estate planning decision making.
Education Savings for Future Generations
Not everyone has super large estates, but there are still some strategies that can help estates of all sizes. You may have children pursuing advanced degrees or grandchildren who may need a future college education. You can always contribute to a 529 plan for your grandchildren. If you want to contribute more than the annual exclusion amount in a year, you can make a special election to spread the contribution ratably over 5 years for gift tax purposes. That can be important because then the gift qualifies for annual exclusion gift treatment and the generation-skipping tax annual exclusion. You can also pay school tuition directly to the school. When you pay tuition directly to the school, it doesn’t even count as an annual exclusion gift.
If you have an adult child pursuing an advanced degree ( yes, a law degree is terribly expensive), you can help by paying tuition directly to the school ( no gift here) and then can gift up to $15,000 a year to them for all those necessities like car insurance, groceries, and rent. Medical payments work the same way as tuition paid to a school. If you pay health insurance premiums, hospital, or other medical bills for them directly to the provider it does not count as a gift.
Almost all households have IRA accounts. It often is one of the largest assets middle-income families have next to their home. The Cares Act changed how nonspousal beneficiaries must take an inherited IRA. For the most part, an inherited IRA will need to be taken within 10 years by a beneficiary who is not your spouse. How an inherited IRA is taken will affect its taxation. There are some variants on this and we would be happy to look at your specific circumstances with you.
Don’t overlook basic planning documents and the impact they have on your family. When was the last time you reviewed your Will, Trust, Health Care Power of Attorney, Durable Power of Attorney, or Living Will? Do they reflect on how to care for your currents needs and family dynamics? These everyday documents can have a lasting impact on your health and welfare while alive and on your family later. Pandemics are never a good thing but they do remind us that life is precious and planning for it while we are here and for our family after we are gone is important.
Advanced Planning Ideas
It’s been a trying year for everyone. In this midst of uncertainty, we have discussed a few strategies that continue to work no matter the climate. In addition to these strategies, there are advanced estate planning ideas that can be deployed for your particular situation. Because every family circumstance is different, ask your CRI professional what might be right for your situation.