Did you know that you can take advantage of tax laws now, and some of these opportunities may disappear next year? The pundits are saying that the depending on who wins the White House, and possibly Congress, changes to income, gift generation skipping transfer and estate taxes may occur. Massachusetts residents should pay careful attention to the Massachusetts estate tax as well as federal tax laws. This recent article from Forbes, Use It Or Lose It: Locking In the $11.58 Million Unified Credit says that the time to act is now.
Whenever a discussion of estate tax comes into play, many people will feel it can never apply to them. After all, the discussion involves estate with millions of dollars, and that does not apply to most people. But a prudent person will know that the dollar values that trigger these taxes can change with one election. Since 2000, the estate and gift tax exemption has taken a leap from $675,000 and a top marginal rate of 55% to an exemption of $11.58 million and a top marginal rate of 40%. However, it’s not permanent. If Congress does nothing, the tax laws go back in 2026 to a $5.6 million exemption and a top marginal rate of 55%. Likewise, part of the democrat tax plan proposals include having the exemption fall to $3.5 million, and the top marginal rate set to 70%. It is anyone’s guess as to whether this $3.5 million figure will be used, as in the past the estate tax has been triggered as low as $1 million, and it is still triggering at that level in Massachusetts. Further, when calculating the tax, don’t forget to include values such as the death benefit of life insurance [if it is not in an ILIT], which in and of itself can propel the size of an estate into tax territory.
A little planning now can make a big difference later.
If you make a taxable gift today, you can effectively make the current tax laws permanent for you and your family. The gift will be reported in the year it is made, and the tax laws that are in effect when the gift is made will permanently applicable. Even if the tax laws change in the future, which is always a possibility, there have been proposed regulations published by the IRS that say the new tax laws will not be imposed on taxable gifts made in prior years.
Let’s say you make an outright taxable gift today of $11.58 million, or $23.16 million for a married couple. That gift amount, and any income and appreciation from the date of the gift to the date of death will not be taxed later in your estate. The higher $11.58 million exemption from the Generation Skipping Transfer Tax (GSTT) can also be applied to these gifts.
Of course, you’ll need to have enough assets to make a gift and still be financially secure. Don’t give a gift, if it means you won’t be able to support your spouse and family. To take advantage of the current exemption amount, you’ll need to make a gift that exceeds the reversionary exemption of $3.5 million. One way to do this is to have each spouse make a gift of the exemption amount to a Spousal Lifetime Access Trust (SLAT), a trust for the benefit of the other spouse for that spouse’s lifetime.
Be mindful that such a trust may draw attention from the IRS, because when two people make gifts to trusts for each other, which leaves each of them in the same economic position, the gifts are ignored and the assets in the trusts are included in their estate. The courts have ruled, however, that if the trusts are different from each other, based on the provisions in the trusts, state laws and even the timing of the creation and funding of the trusts may be acceptable.
These types of trusts need to be properly administered and aligned with the overall estate plan. Who will inherit the assets, and under what terms?
A word of caution: these are complex trusts and take time to create. Time may be running out. Speak with a skilled estate planning attorney with knowledge of tax law like Attorney Keith McManus at McManus Estate Planning, LLC.
Reference: Forbes (July 17, 2020) Use It Or Lose It: Locking In the $11.58 Million Unified Credit