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  • Writer's pictureLeeson & Leeson

Staying Ahead of the Curve – Estate Planning

In the current political climate, a shift in political control in Washington generally means a change in tax laws. Considering the record rate at which the national debt has increased over the past year due to reduced tax revenues from combatting the Covid-19 pandemic and increased expenses in 2020 from federal stimulus packages, a dramatic change in tax laws is likely on the horizon. This is particularly important for estate planning purposes, as there are a number of ways to structure your wealth transference so as to limit your exposure to future increases to estate taxes.

At the end of 2017, Congress passed the Tax Cuts and Jobs Act (“TCJA”) which increased the exclusion amount for federal estate tax from 5 million to 10 million dollars in 2018, [H.R. 1-38, Sec. 11061(a)] as adjusted every year thereafter for inflation [Id. Sec. 12003(a)(4)(B)]. As of 2020, the exclusion amount is 11.58 million dollars. The TCJA expires in 2025; therefore, unless Congress decides to extend the estate tax exclusion, many people will face a dramatic increase in their estate tax liability exposure. Proactive planning can allow individuals who are faced with a large share of their estate being exposed to the 40% estate tax to avoid a potential increase in their tax liability. The following are some strategies that can be used in estate planning to help limit tax liability exposure:

(1) Bypass Trusts

A bypass trust (also referred to as “credit shelter” or “SLAT” trust) is an irrevocable trust that allows a married decedent to bypass estate taxes by transferring assets to a trust at his or her death. Because the assets are transferred to a trust rather than the spouse, the transfer does not add to the surviving spouse’s taxable estate.

For example, if a husband dies after accumulating a 10 million dollar estate and, at the time of the husband’s death, his wife also has a 10 million dollar estate, the husband’s estate would add to the wife’s estate and she would be far above the exclusion amount of 11.58 million dollars and therefore, subject to estate tax on 8.42 million dollars. On the other hand, if the husband sets up a bypass trust, the husband’s share of the estate would be transferred to the trust and not counted in the wife’s estate, thereby resulting in zero estate tax exposure.

(2) Portability Election

In 2010, the Tax Relief Unemployment Insurance Reauthorization and job Creation Act was signed into law and created a new concept now known as portability election. Essentially, portability election allows for the surviving spouse to elect to pick up any of the unused federal estate tax exemption of the deceased spouse. The key here is that the election is NOT automatic; the benefits can be lost if the spouse does not make the election within two years of the decedent’s death.

To illustrate, if a deceased spouse only uses 5 million dollars of the 11.58 million dollar exclusion, the surviving spouse may elect to keep and use the remaining 6.58 million dollars. This results in an 18.16 million dollar exclusion for the surviving spouse. Without this election, the surviving spouse would only have 11.58 million dollar exclusion, potentially missing out on 6.58 million dollars of tax savings.

(3) Gifting Assets

Annually, a person may give gifts of up to 15 thousand dollars to each donee without incurring tax liability and without reducing his/her available estate exemption.

(4) Upstream gifts of low cost basis assets

Inherited assets, generally, are not valued at cost basis when an individual inherits the asset through probate. Rather, the assets receive a step up in basis to the market value of the asset at the date of inheritance. This opens up opportunities for a tax saving strategy that is not often utilized which involves gifting low cost basis assets to parents to receive a step up in basis after the asset passes through the estate of the parents, thereby allowing the gifting relative to avoid capital gains tax. This is particularly relevant now while stock prices are depressed due to the economic slowdown caused by the Covid-19 pandemic.

Estate Planning is complex, even in the most straightforward situations. At the Leeson & Leeson law offices, attorney Joseph F. Leeson, III can assist you with planning and implementing comprehensive strategies that accomplish your goals.



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