Tax Planning

Now’s the time for property tax planning

Two factors make this year a good time to consider succession and wealth planning. First, federal estate and gift tax exemptions hit an all-time high of $ 11,580,000 in 2020 – $ 23,160,000 for couples when portability is chosen on a federal estate tax return. Due to the portability, the unused inheritance and gift tax exemption of a married deceased can be transferred to the surviving spouse. The tax rate is 40%.

That exemption amount will expire in late 2025, but if the Democrats win big in November, chances are good the exemption will fall sooner, perhaps as early as 2021 because Joe Biden has called for a cut. He didn’t give an exact number, but we believe the exemption could return to pre-2018 levels of around $ 5 million ($ 10 million for couples) with inflation adjustments.

Another reason for succession planning is the all-time low IRS interest rates, according to Pamela Lucina, chief fiduciary officer and head of the trust and advisory practice for Northern Trust Wealth Management. The low interest rates make intra-family loans and certain strategies for freezing property and gifts valuable planning tools. She advises high net worth individuals to start planning now by reviewing their goals and finding out how much of their net worth they are willing to part with.

Estate and wealth advisors propose various strategies – three of which we are discussing here – to take advantage of the current large estate and gift tax exemption and low interest rates.

Make gifts outright. You can give up to $ 15,000 to any child, grandchild, or other person in 2020 without filing a gift tax return, paying gift tax, or tapping your exemption. The recipient is also not taxed on the amount received. For example, if you are married with four children and six grandchildren, you and your spouse can give up to $ 15,000 to each of your 10 relatives through 2020 with no gift tax impact. These are tax-free gifts worth $ 300,000.

For gifts made in 2020 that exceed the limit of $ 15,000 per person, the donor must file a gift tax return using IRS Form 709. However, no gift tax is payable in 2020 unless your total lifetime gifts exceed $ 11,580,000. If you’ve been thinking about giving a great gift to a family member, now may be the right time to do it.

Imagine if a grantor keeps the annuity trust. A GRAT freezes the value of assets and carries the increase in value to the next generation without incurring estate or gift tax. An individual transfers investments or other assets into an irrevocable trust for a fixed term, retaining the right to receive an annual stream of income plus interest based on the applicable federal rate of the IRS, which was 0.4% in September. At the end of the term, the assets are distributed to the beneficiaries of the trust, usually the children of the scholarship holders.

The actuarial value of the remaining assets in the GRAT is an upfront taxable gift, but the low interest rate reduces the value of those assets, reducing the gift amount. If wealth grows higher than the 0.4% federal rate, your heirs will receive the value of the additional growth tax-free when the trust expires. Lucina advises people considering a GRAT to work with an advisor now to build the trust, but can wait for it to be funded later.

Intra-family loans are another option. The interest rate on these loans must be equal to or more than the rate set by the IRS for the month the loan is made, which is 1% for long-term loans in September. The IRS pays close attention to loans given between family members and, upon review, may attempt to characterize certain loans as gifts in disguise that are subject to gift tax. Factors that can prove that the money is a loan include a written debt instrument with interest, a fixed repayment schedule and collateral, and a reasonable expectation that the amount will be paid back.

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