How Do I Use the Pandemic to Finish My Estate Plan?

The coronavirus is making this a most challenging time. It can make considering our own death all the more frightening. However, for some, this is the perfect time to think about estate planning strategy. Your estate plan should be a priority in this crisis.

While looking for issues is important, there are also opportunities to consider, according to Yahoo Finance’s recent article entitled “How to Take Advantage of New Estate Planning Opportunities Caused by the Coronavirus.”

For some, the current financial landscape may be advantageous, due to low interest rates and depressed asset values. That is where your estate planning strategy is needed.

The IRS just announced one of the lowest rates applicable to certain wealth transfer techniques. This, in addition to depressed asset prices, can make for some great opportunities.

This is a very good time for estate planning, because of the federal estate tax system. Even though the federal estate tax rate is a flat 40%, we can currently gift during life or leave at death a total of $11.58 million to children or loved ones without any taxes.

As a result, a married couple can leave more than $23 million to loved ones, before they start to pay federal estate tax.

The federal estate tax exemption is very liberal, when compared to the past. It is also scheduled to adjust upward for inflation until the end of 2025. The federal estate tax exemption will then be cut in half, unless extended or made permanent.

Yes, Congress can also act before that. They can enact a law, and a president could sign it to decrease the exemptions even sooner. Therefore, regardless of the current opportunity, it may be the right time to make gifts before the exemptions decrease.

The key is to have a strategic plan and to make decisions that are right for you and your family.

Estate planning can be intimidating and doubly so in this pandemic. Talk to an experienced estate planning attorney and take care of this today to protect your families and their futures.

Reference: Yahoo Finance (April 2, 2020) “How to Take Advantage of New Estate Planning Opportunities Caused by the Coronavirus”

Good News About Gifts

It’s worthwhile to understand the rules about taxes that might be triggered by your generosity, says Forbes in the article “How To Avoid Taxes When Giving Big-Dollar Gifts.” Did you know that you can give any one person as much as $15,000 every year, without having to pay any gift taxes? You can give any number of people up to $15,000 and they don’t even need to be relatives.

Note that if and when any gift taxes are due, it’s the giver who pays any gift taxes, and not the recipient.

Therefore, if you think the world of your next-door neighbor and give him a gift of $20,000, you only owe taxes on the $5,000 above the $15,000 limit, and that’s also if your total gift exceeds your lifetime exclusion. You don’t have to be generous with cash only. Gifts can come in the form of stock, a boat or jewelry. Just remember to keep it under $15,000, so as not to incur any gift taxes.

The $15,000 limit is per person, not per couple, so if you want to give someone $15,000 and your spouse also wants to give them a $15,000 gift, that works. You can double the gift, while still staying under the annual limit.

If your gift is going to a charitable organization—a registered 501(c)(3), you won’t owe anything in gift taxes.

In addition to this $15,000 annual cap, wealthy gift givers should just keep in mind a $11.4 million maximum that is known as the lifetime exclusion. That’s the limit in 2019, and it will rise next year. This governs all the gifting you do during your lifetime. That’s outside of the annual exclusion of $15,000.

Anything more than that in the way of gifts, and you or your estate will have to pay estate tax. The top rate for the overage is high-40%. However, you’ll have to be mighty generous to get near that limit.

Here’s what’s nice: you won’t have to pay gift taxes every single time you go over that $15,000 limit. Let’s say you give your son $50,000 in 2019. Your gift is $35,000 above the ceiling, which is taxable.  However, rather than write a check for taxes to the IRS now, you count it against the $11.4 million lifetime exclusion. You now have $11.365 remaining.

The best way to go about gifting, is to make sure that your desired gifts are working in concert with your estate plan. One reason for gifting “with warm hands” is to reduce the taxable size of the estate, but there are many other ways to do this. There are also instances when gifts need to be reported to the IRS, even if no taxes are owed on them.

Speak with an experienced estate planning attorney about your gifting strategy, how it works with your estate plan and what gift tax forms you do, or do not, need to file.

Reference: Forbes (October 14, 2019) “How To Avoid Taxes When Giving Big-Dollar Gifts”

What are the Details of the New SECURE Act?

The SECURE Act proposes a number of changes to retirement savings. These include changes to parts of IRAs and 401(k)s. The Act is expected to be passed in some form. Some of the changes look to be common sense, like broadening access to IRAs and 401(k)s, as well as including updating the rules to reflect that retirement is now a longer period of life. However, with these changes come potential limitations with stretch IRAs.

Forbes asks in its recent article “Are Concerns Over Stretch IRAs And The SECURE Act Justified?” You should know that an IRA is a tax-wrapper for your investment that is sheltered from tax. Your distributions can also be tax-free, if you use a Roth IRA. That’s a good thing if you have an option between paying taxes on your investment income and not paying taxes on it. The IRA, which is essentially a tax-shield, then leaves with more money for the same investment performance, because no tax is usually paid. The SECURE act isn’t changing this fundamental process, but the issue is when you still have an IRA balance at death.

A Stretch IRA can be a great estate planning tool. Here’s how it works: you give the IRA to a young beneficiary in your family. The tax shield of the IRA is then “stretched,” for what can be decades, based on the principle that an IRA is used over your life expectancy. This is important because the longer the IRA lasts, the more investment gains and income can be protected from taxes.

Today, the longer the lifetime of the beneficiary, the bigger the stretch and the bigger the tax shelter. However, the SECURE Act could change that: instead of IRA funds being spread over the lifetime of the beneficiary, they’d be spread over a much shorter period, maybe 10 years. That’s a big change for estate planning.

For a person who uses their own IRA in retirement and uses it up or passes it to their spouse as an inheritance—the SECURE Act changes almost nothing. For those looking to use their own IRA in retirement, IRAs are slightly improved due to the new ability to continue to contribute after age 70½ and other small improvements. Therefore, most typical IRA holders will be unaffected or benefit to some degree.

For many people, the bulk of IRA funds will be used in retirement and the Stretch IRA is less relevant.

Reference: Forbes (July 16, 2019) “Are Concerns Over Stretch IRAs And The SECURE Act Justified?”