Jun 29th

Top Estate Planning Tips for Those Nearing Tax Exemption Limits

Death and Taxes are two certainties in life, but specific details are lacking leaving them uncertain. The current estate tax exemption is sitting at $11.7 million for singles and $23.4 million for married couples and is set to expire in 2026. While the future of the exemption rate remains uncertain, few advisors are anticipating that tax rates will go down. As the new administration has taken place, along with a pandemic and stimulus payments, it’s likely that tax payments will go up, generating more revenue for government tax revenue.

Derek Hamblet, Vice President and Client Advisor at Whittier Trust says that “It’s all up in the air at this point; we really don’t know what’s going to happen … but at some point, if you don’t use it, you’re going to lose it.”

With uncertainty in tax exemptions, people with more than $5 million in assets will most likely be looking for a way to maximize giving while minimizing taxes. Below are common estate planning techniques for those nearing estate tax exemption limits.

Use The Annual Exclusion

According to Hamblet, one of the simplest methods to lower your taxable estate is to maximize the yearly exclusion limit, which is presently set at $15,000 every year. The donation might be made to a person or a trust. If someone has three children and six grandkids and wishes to give each of them the maximum amount per year, the total would amount to  $135,000 per year without paying gift taxes.

Donate To Charity

Philanthropic individuals can give to charity in their lifetime. Donors overlook donating to appreciated assets like stock by transferring assets from the estate to a charity. Donating in this capacity avoids capital tax gains as the donor is not exclusively selling the assets.

There are other methods of donating to charities including:

– Donate Required Minimum Distributions To Charity (Qualified Charitable Distributions) 

This method includes the IRS requiring those 72 years of age or older to draw annually from their IRAs. Those who do not require this income can make a direct donation to charity with their necessary minimum payout. Taxpayers can contribute up to $100,000 of their dividends to charity under current standards. The contribution also decreases the income tax burden since necessary minimum distributions are normally treated as regular income.

– Use A Donor-Advised Fund

A donor-advised fund consists of qualified charity donations that are exempt from estate taxes, but some contributors prefer more flexibility in their philanthropic contributions. Perhaps they wish to be able to donate to multiple organizations in the future or spread out their contributions over several years rather than in one big payment. These possibilities are available through donor-advised funds, which are flexible accounts dedicated only to philanthropic giving.

Donors contribute a tax-deductible amount to the fund, which grows tax-free.

After that, the donor can make any number of payments from the DAF to any qualifying charity at any time.

– Use A Charitable Split-Interest Trust 

The taxable estate can also be reduced in the situation where giving to charity is to use a more charitable remainder trust or charitable lead trust. A charitable lead trust is a good option for those who want to give to charities in their lifetime to provide for their heirs. A charitable remainder trust operates in another manner. It first benefits a non-charitable beneficiary, such as the donor or a family member, and then provides the remainder to charity at the conclusion of the trust period.

Use A Grantor-Retained Annuity Trust 

Transferring assets to a grantor retained annuity trust—another form of irrevocable split-interest trust—can effectively lower a wealthy person’s taxable estate and bring it closer to the lifetime exemption limit. The assets are no longer considered part of the estate after they have been transferred to the GRAT. In exchange, they will receive an annuity payment from the trust for a certain period of time. The appropriate federal rate, or AFR, is connected to the annuity and any return above AFR can be transferred to a beneficiary tax-free.

The grantor, or the individual who creates the trust and gets the annuity, is still responsible for the trust’s income tax. Hamblet notes, “you’re getting more money out of your estate by paying income taxes rather than reducing the value of the trust.”

GRATs are only valid for a certain number of years. After the GRAT has ended, the assets can be transferred to the recipient or used to fund another GRAT. If the grantor is to die before the trust expiration date the assets don’t revert back to the estate for estate tax purposes. Advisors recommend shorter terms for older clients to avoid this from happening.

While the tax exemption beyond 2026 remains uncertain it is anticipated that it won’t stay at its current value. As wealthy individuals begin nearing the exemption limits, consideration of reducing the size of their taxable estate may be the best option.

For more information, you can download the full report here or visit Forbes to read more.

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