Year-End Estate Planning

The blog article below was written by Daniel Cohen, CPA, who works as a Director in the Tax Department at E. Cohen and as a Wealth Strategist at Impact Capital. In the article, Cohen outlined the importance of reviewing gift and estate plans prior to the end of the year in light of speculation that there may soon be changes to the laws governing federal estate tax exemptions. He also noted that it would be prudent for high-net-worth individuals (couples with more than $10 million in net worth or singles with more than $5 million in net worth) to proactively address their gift and estate plans before 2020 draws to a close.

As the 2020 Election approaches, a renewed focus has been placed on the importance of reviewing estate and gift plans prior to year-end.

As part of the 2017 Tax Cuts and Jobs Act (TCJA), the estate and gift and generation-skipping transfer (GST) tax exemption was doubled from $5 million to $10 million (with annual indexes for inflation, currently $11.58 million) per person.  This increased exemption is currently set to revert to $5 million (indexed for inflation) beginning in 2026.

However, it is possible that this increased exemption will be repealed as part of former Vice President Joe Biden’s tax plan should he win the presidential election, with a possible effective date as early as January 1, 2021.  While the exact lower estate exemption and timing are unknown, this presents individuals with a prudent planning opportunity to explore making large gifts prior to year-end to utilize the increased exemption before it is repealed.  To benefit from the increased exemption, current gifts would need to exceed the future lower exemption amount.  The IRS has recently confirmed that they will not “claw back” any large gifts made under the TCJA’s increased exemption should the exemption revert back to pre-TJCA levels, conveying that this is indeed a use-it-or-lose-it opportunity.

In addition to possibly facing a lower lifetime exemption, there is speculation that the step-up in basis, valuation discounts, GRATS, and Grantor Trusts may be eliminated as well.  Interest rates are also historically low, which allows for more gift flexibility.  These can be powerful tools in transferring assets and future appreciation out of your estate while keeping the value of the gift as low as possible. Some states also apply estate and inheritance taxes and have a lower estate exemptions. Gifting may also help individuals avoid state-level taxes on the value of the estate assets altogether.

Gifts can be made to trusts (GRATS, SLATS, IDGTs, DAPs, QTIP, etc.) or directly to friends and family members.  For those who are hesitant about making large gifts, there are trusts available where taxpayers can utilize the increased exemption, transfer assets out of their estates, and still retain access to the income or cash flow of the trust should they need it in the future.

Completed gifts can take many forms and utilizing the right strategy for your situation is extremely important.  We highly recommend that individuals contact their accountants and estate planning attorneys as soon as possible to discuss their situations and determine whether gifting is the right move for them to make. With all the uncertainty and projected volume increase in gifting ahead of year-end, estate and trust attorneys and public accountants’ work schedules will likely be booked up through the end of the year.


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