This year is an opportune time to consider succession and wealth planning.
One reason is the federal estate and gift tax exemption is at a historic high of $11,580,000 in 2020 — $23,160,000 for couples if portability is elected on a federal estate tax return. Portability allows a married decedent’s unused estate and gift tax exemption to pass to the surviving spouse. The tax rate is 40%.
This exemption amount expires at the end of 2025, but if the Democrats win big in November, odds are good the exemption will fall sooner because Joe Biden has called for lowering it. He hasn’t given an exact figure, but it could revert to pre-2018 levels of about $5 million ($10 million for couples), with inflation adjustments.
Here are two estate planning strategies to consider now before the rules change:
You can give up to $15,000 to each child, grandchild or any other person in 2020 without having to file a gift tax return, pay gift tax or tap your exemption. The recipient isn’t taxed on the amount received either.
Gifts made in 2020 that exceed the $15,000 per person limit will require the donor to file a gift tax return using IRS Form 709, but no gift tax will be due in 2020 unless your total lifetime gifts exceed $11,580,000. If you’ve been thinking of making a large gift to a family member, now may be the time to do it.
Consider a grantor retained annuity trust. A GRAT freezes the value of assets while transferring any appreciation to the next generation at little to no estate or gift tax. An individual transfers investments or other assets into an irrevocable trust for a fixed term, while retaining the right to receive an annual stream of income plus interest based on the IRS’s applicable federal rate, which was 0.4% in September. At the end of the term, the assets are distributed to the trust’s beneficiaries, typically the grantors’ children.
The actuarial value of the leftover assets in the GRAT is a taxable gift upfront, but the low interest rate trims the value of those assets, which tamps down the gift amount. If the assets appreciate at a rate higher than the 0.4% federal rate, your heirs will receive the value of the extra growth tax-free when the trust expires. Pamela Lucina, head of the trust and advisory practice for Northern Trust Wealth Management, advises that individuals who are thinking about a GRAT should begin working with an adviser now to set up the trust but can wait to fund it later.
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(Joy Taylor is editor of The Kiplinger Tax Letter. For more on this and similar money topics, visit Kiplinger.com.)
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