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Don’t overlook this crucial part of estate planning

Shutterstock_590650799We live in a time when numbers are getting so large that they begin to lose meaning. Understanding just how large one million is, is hard enough; when it’s a billion? A trillion? How about 30 trillion?

We’re seeing the largest transfer of wealth in history, as $30 trillion passes to the next generations from the baby boomers over the next two decades. Those estates come in sizes big and small, but they all have one thing in common: taxes. 

In the Tax Cuts and Jobs Act (TCJA) that took effect last year, the individual exclusion from gift/estate and generation-skipping tax was temporarily doubled, and in 2019 now stands at $11.4 million. That means a married couple has an exclusion of $22.8 million to use during their lifetime or at death. Before you go thinking that means estate taxes won’t affect the vast majority of clients, think again: the state your clients live in might not conform to the federal exclusion. It’s important to understand the major tax considerations in estate planning.

The exclusion is doubled through 2025

This applies to the estate, gift and generation-skipping tax through December 31, 2025, and is adjusted annually based on a chained CPI calculation. Above the new exclusion, a flat 40% tax is imposed. There are rumblings about making the exclusion permanent, but for now the smart move is always to work with a plan under existing law.

Basis step-up

The ability to adjust the tax basis of an appreciated asset to current market value at the time of the benefactor’s death is still a valid strategy. This vital tax-saving move can reduce capital gains taxes significantly, or eliminate them entirely, depending on when the beneficiary liquidates the bequest and its final sale price.

State conformity

A major consideration is whether the client’s state conforms to federal law. Some states’ exclusions are considerably lower. Additionally, some states have inheritance or gift tax that could affect your client’s taxes, so being familiar with the law in the client’s state is imperative.

Annual exclusion

The annual exclusion doesn’t count against the individual exclusion, and so is a good strategy for drawing down value without incurring taxes. For 2019, an individual may gift up to $15,000 each to as many people as he or she wishes. That means a married couple can give each of their living children up to $30,000 annually, making this a good way to help reduce estate and inheritance taxes over a long period of time.

Portability

Using a deceased spouse’s unused exclusion can be very helpful for wealthy clients. It’s important to make the election on form 706 in the year of the spouse’s death in order to transfer the unused exclusion to the living spouse. Keep in mind that this cannot be applied to generation skipping transfers.

To hear more about estate planning and taxes for your wealthy clients, listen to my podcast.

There’s more to consider

Of course, most of your clients won’t reach their lifetime exclusion, and precious few will be wealthy enough to need both spouses’ lifetime exclusions. That doesn’t mean your concern about taxes in estate planning goes away.

From the moment of death, the clock starts ticking on your client’s assets. For a basis step-up to provide maximum benefit to their beneficiaries, you want them to have possession of the assets as close to your client’s date of death as possible. Not having a will could significantly delay the transfer of assets to the beneficiaries, potentially costing them in capital gains tax. So make sure you talk to your clients about having an up-to-date will.

Another consideration is the unlimited marital deduction. The entire estate, regardless of value, can pass tax-free from a deceased person to their spouse. The two most popular ways to do this:

  • Outright transfer—simply give assets to spouse.
  • Qualified terminal interest property (QTIP) trust—set up to allow the first decedent’s directive to control the ultimate beneficiary of an asset under control of the surviving spouse once the surviving spouse dies. In the meantime, the surviving spouse draws income (and potentially principal, depending on the trust).

Transferring assets in this way must also cede control of the assets to the surviving spouse (or Trustee of a QTIP trust).

No matter who your client is or how much their estate is worth, they are counting on you to minimize their tax exposure and maximize what they have to pass on to their loved ones. If you want to hone your estate planning skills and demonstrate your mastery to clients, check out the Estate Planning Certificate available now through the AICPA Store.

Lisa R. Featherngill, CPA/PFS is the head of Legacy and Wealth Planning at Abbot Downing. She leads a team of experienced and credentialed professionals who provide traditional planning in a unique way to align with family governance, history and education programs that reflect clients’ values, priorities and goals. Lisa has provided tax and financial planning services to affluent clients and families for almost 30 years.

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