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Estate Tax Planning Tips for Married Couples

Posted on Wed, Nov 28, 2018

The TCJA sets the unified federal estate and gift tax exemption at $11.4 million per person for 2019 (up from $11.18 million for 2018). For married couples, the exemption is effectively doubled to $22.8 million for 2019 (up from $22.36 million for 2018). The exemption amounts will be adjusted annually for inflation from 2020 through 2025. In 2026, the exemption is set to return to an inflation-adjusted $5 million, unless Congress extends it.

What's the GST Tax?

The generation-skipping transfer (GST) tax generally applies to transfers made to people two generations or more below you, such as your grandchildren or great-grandchildren. Transfers made both during your lifetime and at death can trigger this tax — and it's above and beyond any gift or estate tax due.

Under the Tax Cuts and Jobs Act (TCJA), the GST tax continues to follow the estate tax. So, the GST tax exemption also increases under the TCJA. For 2018, both exemptions are $11.4 million per person, or effectively $22.8 million for a married couple. The GST exemption can be a valuable tax-saving tool for taxpayers with large estates whose children also have large estates. With proper planning, they can use the GST exemption to make transfers to grandchildren and avoid any estate or gift tax at their children's generation.

Taxable estates that exceed the exemption amount will have the excess taxed at a flat 40% rate. In addition, cumulative lifetime taxable gifts that exceed the exemption amount will be taxed at a flat 40% rate. Taxable gifts are those that exceed the annual federal gift tax exclusion, which is $15,000 for 2018 and 2019. If you make gifts in excess of what can be sheltered with the annual gift tax exclusion amount, the excess reduces your lifetime unified federal estate and gift tax exemption dollar-for-dollar.

Under the unlimited marital deduction, transfers between spouses are federal-estate-and-gift-tax-free. But the unlimited marital deduction is available only if the surviving spouse is a U.S. citizen.

Important: Some states also charge inheritance or death taxes, and the exemptions may be much lower than the federal exemption. Discuss state tax issues with your tax advisor to avoid an unexpected tax liability or other unintended consequences of an asset transfer.

Exemption Portability

For married couples, any unused unified federal estate and gift tax exemption of the first spouse to die can be left to the surviving spouse, thanks to the so-called "exemption portability" privilege. The executor of the estate of the first spouse to die must make the exemption portability election to pass along the unused exemption to the surviving spouse.

The portability privilege — combined with the increased unified exemption amounts and the unlimited marital deduction — will make federal estate and gift tax bills for married folks a rarity, at least through 2025. That's because the portability privilege effectively doubles your estate and gift tax exemption to a whopping $22.8 million for 2019 (with inflation adjustments for 2020 through 2025).

Important: Exemption portability isn't a new privilege under the TCJA. It existed under prior law, and it will continue to exist after the increased estate and gift tax exemptions expire at the end of 2025.  

Estates below $11.4 Million

If your joint estate is worth less than $11.4 million, there won't be any federal estate tax due even if you and your spouse both die in 2019. That's because the unified estate and gift tax exemption allows either of you to leave up to $11.4 million to your children and other relatives and loved ones without federal estate tax or any planning moves.

But there are still many reasons for you to create (or review) your estate plan. For example, if you have minor children, you need a will to appoint someone to be their guardian if you die. Or you might want to draft a will to designate specific assets for specific individuals. Likewise, if you're concerned about leaving money to a spouse or other individual who isn't financially astute, you might want to set up a trust to manage assets that person will inherit.

Estates between $11.4 Million and $22.8 Million

Couples with joint estates between $11.4 million and $22.8 million are positioned to benefit greatly from exemption portability. If you die in 2019 before your spouse, you can direct the executor of your estate to give any unused exemption to your surviving spouse. If your spouse dies before you, he or she can do the same.

The portability privilege effectively doubles your exemption. That means you and your spouse can transfer up to $22.8 million for 2019 (with inflation adjustments for 2020 through 2025) without incurring estate or gift tax. 

Estates over $22.8 Million

What if your joint estate is worth more than $22.8 million? The generous $11.4 million federal estate tax exemption, the unlimited marital deduction and the exemption portability privilege will work to your advantage. But you may need to take additional steps to postpone (or minimize) federal estate taxes.

For example, Leon and Lucy are a married couple with adult children and a joint estate worth $30 million. They both die in 2019.

Leon dies in February 2019, leaving his entire $15 million estate to Lucy. The transfer is federal-estate-tax-free, thanks to the unlimited marital deduction. Leon also leaves Lucy his unused $11.4 million exemption.

When Lucy dies in November 2019, how much can she leave to her loved ones without incurring federal estate tax? Lucy's estate tax exemption is $11.4 million; she also has the portable exemption ($11.4 million) that Leon left when he died in February. So, she can leave up to $22.8 million to her beneficiaries without incurring any federal estate tax. Minimizing federal estate taxes on the remaining $7.2 million in Lucy's estate would require some additional estate planning moves.

Alternatively, Leon could leave $11.4 million to his children (federal-estate-tax-free thanks to his $11.4 million exemption) and $3.6 million to Lucy (federal estate-tax-free thanks to the unlimited marital deduction). That way, when Lucy dies in November 2019, her estate would be worth $18.6 million (her own $15 million plus the $3.6 million from Leon). Then her exemption would shelter $11.4 million from the federal estate tax. Again, minimizing federal estate tax on the remaining $7.2 million in Lucy's estate would require some additional steps.

Important: The same considerations apply if Lucy is the first to die.

Smart Moves for Big Estates

People with joint estates worth more than $22.8 million should consider planning strategies designed to lower federal estate and gift taxes. Here are a few:

Make annual gifts. Each year, you and your spouse can make annual gifts up to the federal gift tax exclusion amount. The current annual federal gift tax exclusion is $15,000. Annual gifts help reduce the taxable value of your estate without reducing your unified federal estate and gift tax exemption.

For example, suppose you have two adult children and four grandkids. You and your spouse could give them each $15,000 in 2019. That would remove a grand total of $180,000 from your estate ($15,000 × six recipients × two donors) with no adverse federal estate or gift tax consequences. This strategy can be repeated each year, and can dramatically reduce your taxable estate over time.

Pay college tuition or medical expenses. You can pay unlimited amounts of college tuition and medical expenses without reducing your unified federal estate and gift tax exemption. But you must make the payments directly to the college or medical service provider. These amounts can't be used to pay for college room and board expenses, however.

Give away appreciating assets before you die. In 2019, a married couple, combined, can give away up to $22.8 million worth of appreciating assets (such as stocks and real estate) without triggering federal gift taxes (assuming they've never tapped into their unified federal estate and gift tax exemption before). This can be on top of 1) cash gifts to loved ones that take advantage of the annual gift tax exclusion, and 2) cash gifts to directly pay college tuition or medical expenses for loved ones.

To illustrate, say you give stock worth $2 million to your adult son in 2019. That uses up $1.985 million of your $11.4 million lifetime unified federal estate and gift tax exemption ($2 million – $15,000). Your spouse does the same. When it comes to gifts of appreciating assets, using up some of your lifetime exemption can be a smart tax move, because the future appreciation is kept out of your taxable estate.

Set up an irrevocable life insurance trust. Life insurance death benefits are federal-income-tax-free. However, the death benefit from any policy on your own life is included in your estate for federal estate tax purposes if you have so-called "incidents of ownership" in the policy. It makes no difference if all the insurance money goes straight to your adult children or other beneficiaries.

It doesn't take much to have incidents of ownership. For example, you have incidents of ownership if you have the power to:

  • Change beneficiaries,
  • Borrow against the policy,
  • Cancel the policy, or
  • Select payment options.

This unfavorable life insurance ownership rule can inadvertently cause unwary taxpayers to be exposed to the federal estate tax.

To avoid this pitfall, a married individual can name his or her surviving spouse as the life insurance policy beneficiary. That way, under the unlimited marital deduction, the death benefit can be received by the surviving spouse free of any federal estate tax. However, this maneuver can cause too much money to pile up in the surviving spouse's estate and expose it to a major federal estate tax hit when he or she dies.

Alternatively, large estates can set up an irrevocable life insurance trust to buy coverage on the lives of both spouses. The death benefits can then be used to cover part or all of the estate tax bill. This is accomplished by authorizing the trustee of the life insurance trust to purchase assets from the estate or make loans to the estate. The extra liquidity is then used to cover the estate tax bill.

The irrevocable life insurance trust is later liquidated by distributing its assets to the trust beneficiaries (your loved ones). Then, the beneficiaries wind up with the assets purchased from the estate or with liabilities owed to themselves. And the estate tax bill gets paid with money that wasn't itself subject to federal estate tax.

Bottom Line

The TCJA generally improves the federal estate tax posture of taxpayers for 2018 through 2025. But, to achieve optimal results and cover all your bases, you may need to meet with your EHTC Tax Advisor and legal advisor to create or update your estate plan.      

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Tags: Gifts, Estate Planning, Tax Rates, Tax Cuts and Jobs Act (TCJA)

Why Have a Business Valued?

Posted on Mon, Nov 27, 2017

Most business owners are reactive when it comes to having their businesses valued. But it sometimes pays to be proactive. Some valuations are necessities, such as for determining the value of the business interest in an estate. Others are obtained for more elective reasons but are helpful to business owners nevertheless.

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Tags: Gifts, Estate Planning, Business Valuation, Lawsuits, Shareholder

Ten Sources of Tax-Free Income

Posted on Mon, Nov 06, 2017

There are still ways to earn income that is free from federal income tax. With the various tax increases that have taken effect in recent years, tax-free income opportunities are more valuable than ever.

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Tags: Roth IRA, Gifts, Income, Tax-free Income, Life Insurance

Maximize the Tax Deductions Available for Your Generosity

Posted on Mon, Oct 23, 2017

The reporting requirements for claiming charitable contributions of cash on your tax return can be strict. If you don't follow them, your deductions may be disallowed by the IRS. You should also be aware that stringent rules also apply to donations of non-cash property.

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Tags: Individual Taxes, Gifts, Deductions, Charitable Donations

Turning Down An Inheritance

Posted on Fri, May 26, 2017

It's not enough to put together an estate plan for your immediate family. You should also consider any inheritances you might receive from other family members. For example, you might stand to inherit a huge sum from your parents or in-laws. This can complicate matters if you're trying to reduce the size of your own taxable estate.

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Tags: Gifts, Estate Planning, Gift Tax Return

Points to Consider Before Making Gifts to Children

Posted on Tue, Dec 27, 2016

In the world of college financial aid, good estate planning strategies often result in less financial aid for your child or grandchild. For instance, a strategy included in many estate plans involves making annual tax-free gifts to children. Annual gifts can be made, up to $14,000 or $28,000 if the gift is split with your spouse, to any number of individuals with no gift-tax consequences (unchanged from 2016). Once the gift is made, the assets are removed from your taxable estate and any income on the gifts is taxable to the recipient.

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Tags: Gifts, Estate, Children, Financial Aid

It's Time to Review Your Financial Planning Options

Posted on Mon, Aug 29, 2016
Fall is a good time to pause and review your financial planning strategy. A lot can happen in a year. If your personal life, market conditions or tax laws have changed, you may need to revise your long-term financial plans. Here are some retirement and estate planning considerations that may be worthwhile.

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Tags: Roth IRA, Traditional IRA, Gifts, Charitable Giving, Charitable Donations, Roth IRA Conversion

A Trust to Help Fund The Payment of Estate Taxes

Posted on Wed, Jun 08, 2016

Consider this dilemma faced by a high-net worth individual: He doesn't want his heirs to be burdened with estate taxes so he takes out a life insurance policy to cover the tax bill. But then the proceeds of the insurance policy wind up as part of his estate — only to be included for estate tax purposes. In this case, the individual might solve the problem by setting up an irrevocable life insurance trust (ILIT).

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Tags: Gifts, Estate Planning, Trusts

10 Midyear Tax Planning Moves Inspired by the PATH Act

Posted on Thu, Jun 02, 2016
Numerous tax breaks have been retroactively expanded for 2015 and beyond — or, in some cases, been made permanent — under the Protecting Americans from Tax Hikes (PATH) Act of 2015. Now that the dust from the new law has settled, individuals and small business owners can plan ahead with these 10 midyear tax strategies inspired by the recent legislation.

5 Tax Breaks for Individuals

1. Consider tax breaks for college students. If you have a child in college this year, you may be eligible for tax benefits. The PATH Act makes the American Opportunity credit permanent and extends the tuition and fees deduction through 2016. Both of these breaks are subject to phaseouts based on income level. For each student, you may claim either the American Opportunity credit or the tuition and fees deduction, but not both. Thus, while it is possible to claim the credit and the deduction in the same year, you may not claim both for the same student. If your income is too high to take one of these breaks, your child might be eligible.

The PATH Act also permanently treats computers, computer equipment, software and Internet service as qualified expenses for Section 529 savings plans, so distributions for this purpose are tax-free. Summer planning can help maximize your tax benefits for costs incurred for the fall semester.

2. Shop for a new car. If you itemize deductions on your federal income tax return, you can generally deduct state and local income taxes paid for the year. As an alternative, however, you may claim a deduction for state and local sales taxes. This option — which has been permanently extended by the PATH Act — is generally beneficial to taxpayers in locales with low or no state or local income taxes. But it can also benefit taxpayers who make large purchases during the year, regardless of where they live.

The sales tax deduction is determined based on actual receipts or an IRS table that lists amounts for each state. If you opt to use the IRS table, you can add on the actual sales tax paid for certain "big-ticket items," such as cars or boats. If you're in the market for a new vehicle, remember this alternate tax deduction.

3. Transfer IRA funds directly to charity. After you turn age 70½, you must take required minimum distributions (RMDs) from your traditional IRAs, whether you want to or not. These RMDs are taxable in the tax year they're received.

Under a provision made permanent by the PATH Act, if you're age 70½ or older, you may transfer up to $100,000 directly from your IRA to a charity without any tax consequences. In other words, you can't claim a charitable deduction for these transfers, but the payouts aren't taxable either — even if they're used to satisfy your RMD. Act sooner rather than later to avoid year-end scrambling. Keep in mind that this is a per person benefit. Although both spouses may individually transfer up to $100,000 from an IRA to a charity, one spouse cannot "borrow" the other spouse's $100,000 to make a $200,000 transfer.

4. Gift property to a charity. Real estate owners can deduct the value of "conservation easements" made to a charity that preserve the property in its original condition. Charitable deductions for long-term capital gains property (appreciated property that's been held more than one year) are generally limited to 30% of the taxpayer's adjusted gross income (AGI). Any excess may be carried forward for up to 15 years.

Under enhancements made permanent by the PATH Act, the deduction threshold is raised to 50% of AGI (100% for farmers and ranchers) for conservation easements. Any excess may still be carried forward for up to 15 years. One catch, however, is that all such conservation donations must be made in perpetuity.

5. Install energy-saving equipment. Are you dreading the summer heat? It may be time to install a central air conditioning system. There are various requirements to qualify for the credit. First, the home must be your main home. Also, while the credit is generally equal to 10% of the cost of qualified energy-saving improvements, there is a lifetime credit limit of $500. Thus, if you've claimed the credit in a prior year, your current-year credit will be reduced accordingly. Other special dollar limits may apply. It's available for a wide range of items from central air to insulation.

The PATH Act extended the residential energy credit only through 2016. So, it's important to act before this tax-saving opportunity expires. (It may be extended again, but there are no guarantees.)

5 Tax Breaks for Small Businesses

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Tags: Tax, Gifts, Vehicle, Planning, Tax Breaks, College Expenses, PATH Act

Think Outside the Gift Box This Holiday Season

Posted on Wed, Nov 12, 2014

Many businesses scramble around at year end to come up with clever, relevant holiday gifts to send to customers to reinforce brands and cement business ties. But the most memorable ideas aren't necessarily the most expensive. In today's high-paced, electronic world, a well-thought-out holiday card with a personalized, handwritten message can sometimes be a refreshing change of pace.

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Tags: EHTC Article, Gifts, Holiday, Clients, Newsletter, Articles