With the various proposals for estate tax changes being floated in Congress recently, and with the scheduled increases already in place for 2018, many people have been asking whether or not it is necessary to be looking into effecting estate planning changes at this time.
The proposed changes in the House and Senate aside, the current annual gift tax exclusion for 2017 is $14,000 per donor per donee per year, and that increases to $15,000 each in 2018. The gift/estate/generation skipping transfer tax exempt amounts are $5.49M this year and $5.6M next year, less of course whatever one may already have used. So our continuing advice is to “use or lose it” as far as the annual gift tax exclusions are concerned, to take advantage of the additional gift/estate/GST exempt amounts as we now know them, and not to pay any gift taxes if the proposed gifting would otherwise exceed those limits.
Since fewer than one percent of the estates in the United States pay any federal estate taxes, much of the estate planning that is conducted primarily deals with asset protection, asset preservation, investment management, the structuring of asset registrations, and the creation of continuing trusts, with careful attention to the selection of the fiduciary. All of these are legitimate goals, even if one’s assets are less than the $5.6M (or $11.2M per couple) estate tax exempt amounts.
Even if one is approaching the estate exempt amount, or is slightly in excess of it, there are ways to easily "freeze" asset values by keeping future appreciation of those assets out of one’s estate. Some of these steps include simply gifting assets outright or into existing or newly formed irrevocable trusts, effecting short-term grantor retained annuity trusts (GRATs) and/or creating nonreciprocal spousal lifetime annuity trusts (SLATs). All of these techniques may be effected without incurring gift taxes based on current values.
If one’s estate is in excess of the estate exempt amounts, and/or if assets are poised to experience significant appreciation, then other techniques which can be utilized include family partnerships or limited liability companies, closely held corporations, installment sales of interests in those entities to family grantor trusts, the acquisition of single life or joint life insurance policies in an irrevocable trust, and many more vehicles. The foregoing can be funded with the annual gift tax exclusions and the balance of one's gift and estate tax exemptions without incurring any gift taxes. For example, the annual gift exclusions are often used to fund life insurance premiums on policies held in irrevocable trusts, and our continuing recommendations are to use those annual exclusions as early in the year as possible so as not to lose them in the event of an untimely demise. Keep in mind, the irrevocable insurance trusts are often contemplated purely to have a side basket of assets via insurance policy proceeds to offset estate taxes which might be paid in any event. However, another use is to have the trust work on an estate tax free basis to benefit some members of the family to offset what other family members may have already been gifted, for example interests in closely-held businesses, real estate or art or other collectibles during the life of the parents, or they are the anticipated recipients of those assets upon the parents’ demises.
Even if the estate tax is repealed in upcoming legislation, keep in mind that it can always raise its ugly head again under future administrations. Planning for that possibility, in addition to working within the exclusions and exemptions that we now enjoy, can protect significant current and future wealth from the claims of creditors including divorce, estate taxes, and generation-skipping transfer taxes of family members for multiple generations under the guidance of professional trustees.
Because the tax bills proposed in Congress may significantly increase the personal exemptions for income tax purposes, charitable deductions may not be available to you if you elect to take advantage of those exemptions. Therefore, it may be beneficial to increase charitable gifts this year to secure that deduction against 2017 income. These gifts can be outright to your favorite charities, or can be used to fund a donor advised fund from which you can distribute money to charities for years to come (but get the deduction this year), or even be used to fund a charitable remainder trust which will continue to distribute income to you for life and be payable to the charities at your demise. Keep in mind that with the stock market at new highs, making the gifts with appreciated securities lets you avoid potential capital gains and still generate a sizeable income tax deduction this year.
Richard S. Bernstein, CEO of Richard S. Bernstein & Associates, Inc., West Palm Beach, is an insurance advisor for high net worth business leaders, families, businesses, municipalities, and charitable organizations. An insurance advisor to many of America’s wealthiest families, he is a writer, trusted local and national media resource and expert speaker on estate planning and health insurance. Visit his website at www.rbernstein.com. To read more of his reports — Click Here Now.
Thornton M. “Tim” Henry, a shareholder with the law firm of Jones, Foster, Johnston & Stubbs, P.A., in West Palm Beach and Jupiter, is Chairman of the firm’s Private Client Services Group and concentrates his practice in the areas of estate planning, charitable giving and trust and estate administration. He is a frequent lecturer on topics dealing with federal and state taxation, charitable giving and trust and estate administration.
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