Plan Now, As Rules May Change Next Year

It is important to educate yourself now about the current estate planning and income tax planning basics and opportunities, as rules may change in 2021, leaving potential use-it-or-lose-it opportunities for you in the remaining months of 2020.

Estate Planning

At a very basic level, everyone can gift a person $15,000 a year gift and estate tax free. Direct payments of tuition or medical bills for anyone are not gifts.

Everyone has a lifetime gift and estate tax exemption of $11.58 million.

In a year with a gift beyond the $15,000 annual exclusion, the overage uses up an equal portion of the lifetime exemption. Once the exemption is gone, gift tax is due.

Right now, many estate planning experts believe the $11.58M exemption is at risk of being reduced substantially to $5M or $3.5M or less, and the estate tax rate of 40% may also increase.

A basic estate plan upon death of the first spouse, places their 50% of the estate in a Marital Trust (for the benefit of the surviving spouse for life) and in a Family Trust. The amount that goes into the Family Trust is equal to the remaining lifetime exemption and thus the trust is funded estate tax free. The remaining amount funds the Marital Trust and is also estate tax free because an unlimited amount of gifts to a spouse are tax free.

Again, the $11.58M may be reduced. One planning option is to fund a trust today that uses the $11.58M while the exemption is available versus waiting for death, when the exemption may be less.

There are many estate planning vehicles that can be used for the benefit of the family.

Here is a short list:

  • Update your Living / Revocable Trust
  • Spousal lifetime Access Trust (SLAT)
  • Family Limited Partnership (FLP) of Family Limited Liability Company (FLLC)
  • Irrevocable Life Insurance Trust (ILIT)
  • Intentionally Defective Grantor Trust (IDGT)
  • Grantor Retained Annuity Trust (GRAT)
  • Charitable Lead Annuity Trust (CLT)

In addition, simple estate planning includes annual gifting, funding college savings plans, low interest rate loans and such. Read BPM’s Estate Planning Strategies and COVID-19 article for a slightly more detailed discussion.

Quickly jump start estate planning by reviewing your current plan to see if it accomplishes your current goals.

Note: Gift and Estate tax planning guidance for non-U.S. citizens, such as residents and green card holders, is complex and above the scope of this article. Consult your BPM tax advisor for more information.

Income Tax Planning

Federal income tax rates may increase in 2021, with highest ordinary rates of 39.6% versus 37%, capital gain rates of 39.6% for individuals with taxable income greater than $1M, and itemized deductions may be limited for individuals with taxable income over $400,000.

You need to consider:

  • Planning strategies to recognize income and defer expenses (the opposite of usual year-end tax planning)
  • Accelerating capital gains into 2020
  • Accelerating bonuses and ordinary income
  • Timing of large charitable donations
    • Deferring to capture a greater benefit due to higher rates
    • Accelerating to avoid additional itemize deduction limits
  • Contributing cash up to 100% of adjusted gross income (AGI) for 2020 only (the CARES Act allows certain charitable contributions).
  • Donating in 2020 to Donor Advised Funds and Private Foundations do not qualify for the 100%
  • Converting ROTHs

Note: The California legislature is considering Assembly Bill 1253, which will tax income above $1M an extra 1%. Taxable income above $2M would get hit with a 3% tax hike, while those above $5M would be taxed an extra 3.5%. Lawmakers proposed to raise taxes on the high income individuals to offset lost revenue due to the coronavirus crisis – before California’s current fire crisis.

Prepare your 2020 income tax planning now, and execute after the November election when there may be more clarification of the 2021 proposed federal income tax legislation.

For more information about these topics, reach out to BPM’s Private Client Services group or contact us today.

Rich McDonnell

Sandy Murray

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