Gift & Estate Tax Planning in 2020

by Lee D. Heckman, Esq.

2020 has been rough. Although many of us are eager to turn the page and start afresh in 2021, when it comes to updating your estate plan, you may wish this year lasted a little longer. Indeed, there are compelling reasons for some clients to do significant estate planning in 2020, but with less than three months left in the year, the window to act is closing fast.

Over the last few years (and this year in particular), there have been several significant changes to tax laws, estate and gift tax exemptions, and rules governing retirement accounts and charitable giving. As a result, now may be a great time to review your estate plan to determine whether you should make some changes.

In 2020, an individual has $11.58 million worth of estate and gift tax exemption. This means that a person can give away $11.58 million during their lifetime and not pay any gift tax (but they would die with $0 estate tax exemption remaining). Similarly, under current law, if a person used no lifetime gift tax exemption, he or she could give away up to $11.58 million on death without paying any estate tax. It’s also permissible to use any combination of lifetime gift tax exemption and estate tax exemption to reach that $11.58 million figure. For instance, if someone gave away $2.58 million during their lifetime, then under current law, they would have $9 million of estate tax exemption remaining. Once the exemptions are used up, the federal gift tax rate and the federal estate tax rate is 40%. Ohio abolished its estate tax in 2013.

Furthermore, for married couples, these gift and estate tax exemptions are collectively double the $11.58 million amount because of “portability.” This means that if a spouse dies in 2020 with $11.58 million of estate tax exemption, and uses $2 million of exemption on death, the surviving spouse can elect to take the predeceased spouse’s $9.58 million of remaining estate tax exemption to use in his or her estate (but only by filing a federal estate tax return to elect “portability,” even though no tax is due on the death of the first spouse). This allows the surviving spouse, under current law, to then give away up to $21.16 million during life or after death without paying any gift or estate tax.

The catch is that the $11.58 million gift and estate tax exemptions are only temporary. Even if Congress takes no action, these historically high exemption amounts will be cut in half on January 1, 2026. But these historically high estate and gift tax exemptions could be cut in half or more much sooner than that.

Many of the national estate and tax planning commentators are predicting that if Joe Biden wins the presidency and the Democrats retake the Senate, then the exemptions amounts will be reduced next year, perhaps to as low as $3.5 million per person. Even if such a law isn’t passed right away, it could be made retroactive to January 1, 2021. Other proposals that have been around for some time that could be enacted include lowering the gift tax exemption amount to $1 million, limiting annual gifting, and so forth. This has led many estate and tax planning experts to call for clients to use lifetime gift exemptions now.

Many clients are concerned about using lifetime gift exemptions, and for obvious reasons. There are lots of unknowns and some risks. First, we have no idea what the results of the November election will be, and even if we could accurately predict, we don’t know for sure what action a new Congress might take. Second, there is no guarantee that a change in the law will stay permanent. The only consistent part of Estate and Gift Taxes in the last 20 years has been a lot of change. Third, gifts on death get a “step-up” in basis, but lifetime gifts do not, so the capital gains tax issues may give some potential donors pause. Fourth, some wealthy clients may be facing decades of retirement and are unsure how much that will cost, or how much health care will cost, and losing access to emergency funds may be a deal breaker. So what can be done?

On the issue of access to funds, although a gift must be completed to count, there are ways to retain at least some access to gifted funds. One method for married clients is a Spousal Lifetime Access Trust. This option involves making a large gift to your spouse and descendants now and allowing your spouse to have income for his or her life, with the assets passing down to children or more remote descendants on the death of the spouse. Another option in Ohio is to use a Domestic Asset Protection Trust, which could be used by an individual whether they are married or not.

There are other strategies available, too, some of which may be good options in 2020 irrespective of the high exemption amounts. These strategies include: (1) Grantor Retained Annuity Trusts (“GRATs”); (2) gifts using valuation discounts; (3) intrafamily loans; and (4) Charitable Remainder Unitrusts (“CRUTs”). GRATs and gifts using valuation discounts are especially attractive now because they are the most likely to be eliminated next year if change comes to Washington, so this could be the last year to take advantage of them. They are also attractive now, along with intrafamily loans, because of very low interest rates. CRUTs have been around for decades and are a great option for anyone with charitable inclinations, but recent changes to rules regarding retirement accounts have made CRUTs are a particularly attractive option for those who have significant assets in retirement accounts.

Even with the uncertainty about the November election and future potential changes in the law, it is difficult to imagine a time when the estate and gift tax exemptions will be higher than they are now. It is certainly possible, but lowering gift and estate tax exemptions is much more palatable to many in Congress than raising income taxes. In sum, there are several good reasons why you should at least explore the many options at your disposal. But good planning takes time, and time is running short. There are pros and cons to each one of these options and every client’s situation is different. If you are interested in learning whether one or more of these options is right for you, contact an attorney at REESE PYLE MEYER and we would be happy to discuss in more detail.


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