Estate Planning for Changing Economic Times

Estate plans created during a historically low interest rate environment may need to be re-examined and new techniques considered, according to a recent article titled “Estate Planning For A New Day” from Financial Advisor.  Inflation changes the future value of assets and the value of real estate and taxes due on distributions. For an estate plan to succeed, it is critical to know the value of the assets and how the value of those assets change over time. Accurately determining the value of an estate is necessary to measure any potential estate tax liabilities and plan for their payment.

Inflation may also impact how much is gifted during life or after death without paying federal estate taxes. These exemption levels are reevaluated every January 1 and increase, if warranted, by inflation.

Inflation will cause the federal estate and gift tax exemptions to increase significantly in January 2023, which will give wealthier clients the ability to make large gifts in 2023. For 2022, the exclusion for gifts other than those for medical or educational purposes is $16,000 per donor. However, gifts over that amount count towards the lifetime exemption, currently at $12.06 million per person. The lifetime exemption works jointly with the estate tax exemption and also covers transfers gifted through the estate.

How much these amounts are adjusted is determined by federal inflation estimates, which are not always accurate. If real inflation exceeds the government’s projections, an estate could become taxable due to inflation alone. Once the 2017 Tax Cuts and Jobs Act expires in 2025, the exemption amounts are set to take a nosedive.

Unless Congress acts, on Jan. 1, 2026, the lifetime exemption amount will revert to its old level, or even lower. Now is the time to look into using those exemptions.

Some professionals believe inflation has little impact on estate planning, which is by its nature a long-term matter and not subject to daily ups and downs of markets or news cycles. However, inflation is tied to interest rates, and rising interest rates need to be considered since they impact estate planning strategies.

Charitable remainder trusts (CRTs) are more attractive now because of higher interest rates. The initial donation to the trust is partially tax-deductible and any income generated by the trust is tax exempt. The trust, which is irrevocable, then distributes income to the grantor or beneficiary for a specified period of time. At the conclusion of the time period, the remainder is donated to charity.

GRATS and QPRTs are less advantageous, since they rely on declining interest rates. GRATS allow assets to be locked into irrevocable trusts for a set period of time, during which the beneficiaries can draw an annual income at interest rate set by the IRS. When the term expires, any appreciation of the original assets, minus the payout rate, passes to heirs with little or no gift taxes.

Qualified personal residence trusts (QPRTs) allow users to lock away the value of a residence in an irrevocable trust for a period of time. The grantor can remain in the home and keep partial interest in its value. Afterwards, the rest of the value, determined by the IRS, is transferred to heirs. The goal is to remove the family home from the estate and decrease the gift tax incurred by otherwise transferring the asset. However, if the grantor dies before the trust expires, the value of the residence is included in the estate and taxed with it.

Your estate planning attorney will be able to review your current estate plan with an eye to rising interest rates and inflation and deem which strategies still work, which don’t and how best to move forward. This has been a general overview and individual counsel is critical.

Reference: Financial Advisor (Oct. 1, 2022) “Estate Planning For A New Day”

Estate Planning Actions to Consider before 2020 Ends

When it comes to estate planning, there’s no such thing as a “one-size-fits-all” solution. That is especially true before a presidential election. However, there are several factors that should be considered and discussed with your estate planning attorney, as recommended in this recent article from The National Law Review “Top Ten Estate Planning Recommendations before the End of 2020.”

The estate, gift and generational-skipping transfer tax exemption is now $11.58 million per person. It’s scheduled to increase every year by an inflationary indexed amount through 2025 and in 2026 will revert to $5 million. If Biden wins the election, don’t be surprised if changes are made earlier. The IRS has already said that if the exemption is used this year, there will be no claw back. This is a “use it or lose it” scenario. If you are planning on using it, now is the time to do so.

It is possible that Discounts, GRATS, Grantor Trusts and other estate planning techniques may go away, depending upon who wins the election and control of Congress. Consider taking advantage of commonly used estate planning tools before it is too late.

Married couples who are not ready to gift significant amounts to their children or to put assets into trusts for their children should consider the SLAT–Spousal Lifetime Access Trust. They can create and gift the exemption amount to a SLAT and still maintain access to the assets.

Single individuals who similarly are not ready to make large gifts and give up access to assets may also create and gift an exemption amount to a trust in a jurisdiction based on “domestic asset protection trust” legislation. They can be a beneficiary of such a trust.

Interest rates are at an all-time low, and that is when tools like intra family loans, GRATs and GLATs are at their best.

Moving to Florida, Nevada, Texas and other low- or no-income tax states has become very popular, especially for people who can work remotely. Be aware that high tax states like New York and California are not going to let your tax revenue leave easily. Check with your estate planning attorney to make sure you’re following the rules in giving up your domicile in a high-income tax state.

Reference: The National Law Review (Oct. 6, 2020) “Top Ten Estate Planning Recommendations before the End of 2020”