Developing a sound estate plan while you are healthy can go a long way toward saving your estate and family members from significant tax liabilities after you pass away. However, it is important to recognize that estate planning is on on-going process that will require frequent review and modifications based on changes to both your personal circumstances and the annual inflation adjustments to federal tax laws.
Thanks to the Tax Cuts and Jobs Act (TCJA) and the doubling of the federal estate tax exemption, only a small number of high-net-worth taxpayers will be subject to a 40 percent federal estate tax for tax years 2018 through 2025.
For 2020, you may transfer up to $11.58 million in assets to your heirs during life or at death without incurring federal estate or gift taxes, up from $11.4 million in 2019. Married couples filing joint tax returns can shield, or exclude, up to $23.6 million from federal estate taxes, up from $22.8 million the prior year. However, it is important to recognize that the results of the 2020 presidential election could impact these amounts and even decrease the exemption limits by more than half in the future. With this in mind, take the time to meet with your financial advisors to plan very carefully for the year ahead.
One way to reduce exposure to federal (and state level) estate taxes is to make annual gifts to others. In 2020, you may gift $15,000 or less to as many people as you wish free of gift taxes. The exclusion amount doubles to $30,000 if you are married and file a joint tax return with your spouse. For example, you may remove $45,000 from your taxable estate in 2020 by gifting $15,000 to each of your three children. If you are married, you and your spouse can give three gifts of $30,000 for a total of $90,000. In addition, you can give very generously to your spouse without incurring gift taxes, since there is not limit on the amount that passes between spouses. Similarly, you can avoid gift taxes when you pay for private school or post-secondary school education or medical expenses of another party and your payment does directly to the service provider. Payments made directly to a student or patient will have gift tax consequences.
When engaging in estate planning, it is also critical to consider the impact that federal income tax rates will have on you during life and your heirs after you pass. For example, keeping assets in your estate during your life can expose you to federal income tax rates as high as 37 percent, plus a 3.8 percent Medicare tax as well as 20 percent tax on long term capital gains. In addition, trust income exceeding $12,950 in 2020 may also be subject to the highest 37 percent tax rate, placing a significant tax burden on the trust whereas a gift to an individual heir/beneficiary in a lower tax brackets will mean less of your heard-earned money going to the federal government.
Without the ability to see into the future and know the outcome of the upcoming elections, high-net-worth families should take the time now to meet with their financial advisors and consider how they can leverage the higher exemptions through 2020 to their advantage before a potential shift in political policy and tax laws.
About the author: Todd A. Moll, CFP®, CFA, is a director and chief investment officer with Provenance Wealth Advisor, an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs, and a registered representative with Raymond James Financial Services. For more information, call (954) 712-8888 or email firstname.lastname@example.org.
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Todd A. Moll is a registered representative of and offers securities through Raymond James Financial Services, Inc., Members FINRA/SIPC.
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Please note that changes in tax laws may occur at any time and could have a substantial impact upon each person’s unique situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation.