Estate Planning Considerations

Published 01/08/2020

By Mary Pat Wesche, CPA, PFS, CDFA®, CFP® and Norbert Mindel, JD, CPA, CFP®

The Tax Cuts and Jobs Act that became effective in January 2018 drastically reduced the number of estates affected by the federal estate tax, putting estate tax planning on the back burner for many people. In 2020, the estate tax exemption is $11.58 million per person. However, there is greater potential for repeal with the possibility of changing political administrations. The current law sunsets in 2025, but repeal prior to that could mean that 2020 would be the last year for some estate planning strategies.

Opinions on what the estate tax could be if it were to be repealed range from cutting the current exemption in half to restoring the exemption to $3.5 million per person. Some have also speculated that marginal tax rates could increase significantly.

Note that this article only deals with federal law. You should be familiar with your state estate tax law, as many states have an estate tax with a far lower exemption than the federal one.


Understanding Your Estate and Exemption

Your estate includes everything you own, including both liquid and non-liquid assets. This includes the value of your business, life insurance proceeds at your death, real estate, retirement accounts, etc.

In 2020, an individual does not begin to incur estate tax until that estate exceeds $11.58 million; this is the estate tax exemption. For married couples, their combined exemption may total to $23.16 million but only if assets are titled correctly and elections are made at the first spouse’s death. The highest federal rate is currently 40%, so planning can save a significant amount of money.

There are several actions you can take to reduce or avoid the tax down the road if your estate falls into this category, or if it could fall into the taxable estate category if a repeal of the Tax Cuts and Jobs Act were to take place before 2025.


Six Estate Plan Strategies to Consider in 2020

Utilize your current exemption to gift assets while you are alive. This means you could gift up to $11.58 million in 2020 with no tax to be paid. The IRS has stated that they will not clawback lifetime gifts if the exemption is decreased in the future.

Place your life insurance policies in irrevocable life insurance trusts. Moving life insurance policies in this way would effectively take them out of your estate. There is a three-year lookback period, but it may make sense to start the process if doing so brings you below the future taxable estate level.

Fund 529 plans for children and grandchildren. You can take these funds out of your estate while still allowing you to retain some control. You are allowed to fund five years of annual gifts (currently $15,000 per individual) up front. As an example, a married couple could fund $150,000 per child or grandchild this year without incurring any taxes. An informational gift tax return should be filed, but the gifts and all future appreciation will reduce the taxable estate.

Gift real estate or other assets to your heirs through a Family Limited Partnership (FLP). While discounts may be more difficult to obtain with some recent court cases, the FLP strategy may reduce your estate and allow you to control the assets while you are alive.

Establish a Spousal Lifetime Access Trust (SLAT). One spouse can set up a SLAT for the benefit of the other spouse and other family members. These trusts are irrevocable and shelter future asset growth, so they can be a great strategy for assets that will appreciate significantly.

Establish a Grantor Retained Annuity Trust (GRAT). You can essentially freeze your estate using a GRAT by removing appreciation on assets from your estate while retaining a stream of income. There are also a number of other types of trusts as well as installment sales to grantor trusts that could be established depending on your circumstances.


Understanding Your Options

To find out if any of these strategies could work for you, you should consult an estate planning attorney. It is possible to implement more than one option, depending on your specific mix of assets, cash flow needs and your preferences on gifting a portion of your estate.

Remember that you have to evaluate the size of your estate as well as your own future income needs to choose the strategy that best works for you. To learn more about any of these estate planning strategies, contact your financial advisor.

We recommend that you consult an estate planning attorney before exercising any of the options described in this article as every situation is unique.