Now that the gift and estate tax exemption has reached a record high of $11.18 million (for 2018), it may seem that gifting assets to loved ones is less important than it was in previous years. However, lifetime gifts continue to provide significant benefits, whether your estate is taxable or not.
Let’s examine three reasons why making gifts remains an important part of estate planning:
1. Lifetime gifts reduce estate taxes. If your estate exceeds the exemption amount — or you believe it will in the future — regular lifetime gifts can substantially reduce your estate tax bill.
The annual gift tax exclusion allows you to give up to $15,000 per recipient ($30,000 if you “split” gifts with your spouse) tax-free without using up any of your gift and estate tax exemption. In addition, direct payments of tuition or medical expenses on behalf of your loved ones are excluded from gift tax.
Taxable gifts — that is, gifts beyond the annual exclusion amount and not eligible for the tuition and medical expense exclusion — can also reduce estate tax liability by removing future appreciation from your taxable estate. You may be better off paying gift tax on an asset’s current value rather than estate tax on its appreciated value down the road.
When gifting appreciable assets, however, be sure to consider the potential income tax implications. Property transferred at death receives a “stepped-up basis” equal to its date-of-death fair market value, which means the recipient can turn around and sell the property free of capital gains taxes. Property transferred during life retains your tax basis, so it’s important to weigh the estate tax savings against the potential income tax costs.
2. Tax laws aren’t permanent. Even if your estate is within the exemption amount now, it pays to make regular gifts. Why? Because even though the Tax Cuts and Jobs Act doubled the exemption amount, and that amount will be adjusted annually for inflation, the doubling expires after 2025. Without further legislation, the exemption will return to an inflation-adjusted $5 million in 2026.
Thus, taxpayers with estates in roughly the $6 million to $11 million range (twice that for married couples), whose estates would escape estate taxes if they were to die while the doubled exemption is in effect, still need to keep potential post-2025 estate tax liability in mind in their estate planning.
3. Gifts provide nontax benefits. Tax planning aside, there are other reasons to make lifetime gifts. For example, perhaps you wish to use gifting to shape your family members’ behavior — for example, by providing gifts to those who attend college. And if you own a business, gifts of interests in the business may be a key component of your ownership and management succession plan. Or you might simply wish to see your loved ones enjoy the gifts.
Regardless of the amount of your wealth, consider a program of regular lifetime giving. We can help you devise and incorporate a gifting program as part of your estate plan.
Irrevocable trusts can allow for the smooth, tax-advantaged transfer of wealth to family members. But there’s a drawback: When you set up an irrevocable trust, you must relinquish control of the assets placed in it. What you can control is who will eventually oversee distribution of the assets after your death. That is, you can appoint the trustee. But if you aren’t completely confident that the trustee will carry out your wishes, you might want to appoint a trust protector, too.
Trust protector duties
A trust protector is to a trustee what a corporate board of directors is to a CEO. A trustee manages the trust on a day-to-day basis. The protector oversees the trustee and weighs in on critical decisions, such as the sale of closely held business interests or investment transactions involving large dollar amounts.
There’s virtually no limit to the powers you can confer on a trust protector. For example, you can enable a trust protector to replace a trustee, to appoint a successor trustee or a successor trust protector, and to approve or veto investment or beneficiary distribution decisions. He or she can also resolve disputes between trustees and beneficiaries.
A word of warning: Although it may be tempting to provide a protector with a broad range of powers, this can hamper the original trustee’s ability to manage the trust efficiently. Keep in mind that the idea is to protect the integrity of the trust, not to appoint a co-trustee.
Exercise of discretion
Trust protectors offer many benefits:
Choosing the right trust protector is critical. Given the power he or she has over your family’s wealth, you’ll want to choose someone whom you trust and who’s qualified to make investment and other financial decisions.
Many people appoint a trusted advisor — such as an accountant, attorney or investment advisor — who may not be able or willing to serve as trustee but who can provide an extra layer of protection by monitoring the trustee’s performance. Contact us if you’d like to learn more about incorporating a trust protector into your estate plan.
Direct physical damage to your premises is not the only problem you’ll face with a fire or other loss. Here are some important points to consider when evaluating your indirect damage:
If you’re charitably inclined, you may wish to consider a charitable gift annuity. It can combine the benefits of an immediate income tax deduction and a lifetime income stream. Furthermore, it allows you to support a favorite charity and reduce the size of your future taxable estate.
What is it?
A charitable gift annuity is an arrangement in which you make a gift of cash or other property to a charity in exchange for a guaranteed income annuity for life. This is similar to buying an annuity in the commercial marketplace, except that you potentially can claim an immediate charitable deduction for the excess of the value of the property over the value of the annuity.
The payouts will generally be lower than those of a commercial annuity because a portion of your charitable gift annuity investment benefits charity. For you to claim a charitable deduction, the charity must receive at least 10% of the initial net value of the property transferred.
The annuity may be payable to you over your life, or over the joint lives of you and someone you’ve designated (a joint and survivor annuity). The rate of return is typically set at the time of the gift based in part on your age (and, if it’s a joint and survivor annuity, the age of the other person you’ve designated). A portion of each annuity payment is tax-free, because you’re entitled to recover your original investment over your life expectancy.
What’s my deduction amount?
Your charitable deduction will be less than the total value of your annuity purchase price because the deduction can be claimed for only the present value of the property that the charity will keep after your death. The present value is based on life expectancy and an IRS-prescribed interest rate at the time of purchase of the annuity.
Additional rules and limits apply to charitable gift annuities. Talk with us if you’re charitably inclined and would like to know if a charitable gift annuity is right for your estate plan.
For many people today, income tax planning offers far greater tax-saving opportunities than gift and estate tax planning. A record-high gift and estate tax exemption — currently $5.49 million ($10.98 million for married couples) — means that fewer people are subject to those taxes.
If gift and estate taxes aren’t a concern for your family, it can pay to focus your planning efforts on income taxes — in particular, on basis planning.
Benefits of a “stepped-up” basis
Generally, your basis in an asset is its purchase price, reduced by accumulated depreciation deductions and increased to reflect certain investment costs or capital expenditures. Basis is critical because it’s used to calculate the gain or loss when you or a loved one sells an asset.
Under current law, the manner in which you transfer assets to your children or other beneficiaries has a big impact on basis. If you transfer an asset by gift, the recipient takes a “carryover” basis in the asset — that is, he or she inherits your basis. If the asset has appreciated in value, a sale by the recipient could trigger significant capital gains taxes.
On the other hand, if you hold an asset for life and leave it to a beneficiary in your will or revocable trust, the recipient will take a “stepped-up” basis equal to the asset’s date-of-death fair market value. That means the recipient can turn around and sell the asset tax-free.
Undoing previous gifts
What if you transferred assets to an irrevocable trust years or decades ago — when the exemption was low — to shield future appreciation from estate taxes? If estate taxes are no longer a concern, there may be a way to help your beneficiaries avoid a big capital gains tax hit.
Depending on the structure and language of the trust, you may be able to exchange low-basis trust assets for high-basis assets of equal value, or to purchase low-basis assets from the trust using cash or a promissory note. This allows you to bring highly appreciated assets back into your estate, where they’ll enjoy a stepped-up basis when you die. Keep in mind that, for this strategy to work, the trust must be a “grantor trust.” Otherwise, transactions between you and the trust are taxable.
Is your basis covered?
Before making any changes to your estate plan, be aware that, if an estate tax repeal is signed into law, it’s possible the step-up in basis at death could go away, too. We can keep you apprised of the latest developments and help you determine whether your family would benefit from basis planning.
When you purchase a life insurance policy, the amount you’ll pay in premiums is determined by factors you control.A life insurance policy is a contract between you and a life insurance company. The insurer agrees to pay your beneficiaries a benefit if you die. The rate you pay is determined by health factors and the type of policy you choose, either term or permanent. A term policy is good for a limited time and is less expensive; a permanent policy costs more, but provides lifetime coverage.
Naturally, there are some factors you can’t control: your age and your family health history. The older you are, the higher your rates. Evidence that a close relative has a chronic disease, such as cancer, may lead to higher rates. Women usually live longer than men, so men will see a higher premium.
Fortunately, there are number of actions you can take to lower your life insurance premiums.
Being overweight is costly. Studies show that if you are 25 percent overweight, you have a 25 percent greater chance of dying at a younger age than someone who isn’t overweight. Excess weight can lead to a variety of health issues, such as high blood pressure, heart or digestive problems, high blood pressure, or diabetes.
Not only can being overweight affect the quality of your life, but life insurance companies often decline coverage or charge higher rates when someone is obese. Losing weight right before applying for insurance won’t help because the insurance company takes your weight average over 12 months. So, plan ahead!
Watch Your Sodium Intake
Insurance carriers want to know if you have high blood pressure, a condition that adds stress to your arteries and can lead to serious problems, such as heart disease and strokes.
One way to lower blood pressure is by limiting foods that are high in salt. The American Heart Association recommends no more than 2,300 milligrams of sodium per day. Choose carefully. High levels of sodium can be found in many of foods we consume daily. Three ounces of deli turkey can have 1,050 milligrams of sodium, while a whole a cheeseburger can have up to 1,690 milligrams of sodium.
Limit Alcohol Consumption
An occasional drink won’t affect your rates, but more than two drinks a day will knock you out of preferred, lower rates. Three or more daily drinks will take you out of standard rates. Insurers take this into consideration because alcohol abuse can lead to cardiovascular problems, dementia, stroke, depression, liver disease and gastrointestinal problems.
Choose a Less Dangerous Occupation
If your job has a higher than normal chance of leading to premature death, you could be denied coverage or may have to pay higher premiums. An insurance company might charge $2 more for every $1,000 of coverage. If you have a $200,000 policy, it would cost you an extra $400 annually.
Occupations falling into that category include logging and fishing. Other occupations that can lead to higher premiums are truck driving and on-the-road sales, because they expose the worker to hazardous conditions, such as falling asleep behind the wheel.
If you want to know whether your job is considered a risk, review the Bureau of Labor Statistics list of dangerous occupations. It’s the list many insurance companies use to determine risk.
Stop High-Risk Recreational Activities
Do you like to live on the edge, participating in activities like skydiving, skiing, hang gliding, rock climbing, hot air ballooning or scuba diving? Participation in risky activities could mean you will be denied coverage or be charged higher rates. Remember, not all insurers use the same list, so it pays to talk to your advisor for options.
Smoker in their 30s can expect to pay two to three times more for a policy than nonsmokers. Smokers in their 40s can expect to pay three to four times more.
Don’t omit this information on your application. Providing false information can be considered insurance fraud. Many insurance companies require a medical exam. Evidence you’re a smoker will show up on the blood and urine tests. If you manage to hide this fact, but die during the first two years of the policy, and it’s discovered you smoked, your beneficiaries could be denied the benefits.
The good news is that if you quit smoking, you can qualify for lower rates within a year. And, if you smoke cigars occasionally or chew tobacco, let your insurance company representative know. These forms of tobacco will show up on your blood test, but some insurance companies may be more lenient with these tobacco uses and may give you a non-smoker rating.
For more information on life insurance or a quote, please contact us.
These trends affect both public and private companies:
• Regulatory enforcement. The Department of Labor, Federal Trade Commission and other agencies have stepped up enforcement in recent years, which have resulted in claims of mismanagement against directors and officers who fail to prepare for this increased enforcement. However, a new report by Marsh has predicted that the impact of these and other regulations including under Sarbanes-Oakley and Dodd-Frank may be diminished as a result of actions taken by the Trump administration.
• Emerging risks. These include cyber liability, environmental liability, breach of privacy, reputation risks and more. Failure to take action to protect the company against these risks could result in claims of negligence against directors and officers. As more specific insurance for some of these risks, such as cyber and environmental liability, have been developed, some pressure on D&O policies and premiums have been reduced.
• Changing policies. Insurers have been adding exclusionary language to insurance policies the past few years, limiting coverage and leaving officers and directors personally responsible for claims not covered by those policies. The Marsh report has speculated, however, that reduced D&O claims and a better outlook for D&O insurance may result in companies offering to “sell back” some exclusionary terms and even offer reduced premiums.
Source: Marsh’s full report is “The U.S. Financial and Professional Market in 2017: Our Top 10 List.”
DSG's Tony Yu, Attorney & CPA, to Speak at Annual Community Seminar for Business Owners and New Immigrant Families
If a substantial portion of your wealth is tied up in a family or closely held business, you may be concerned that your estate will lack sufficient liquid assets to pay federal estate taxes. If that’s the case, your heirs may be forced to borrow funds or, in a worst-case scenario, sell the business in order to pay the tax.
For many eligible business owners, Internal Revenue Code Section 6166 provides welcome relief. It permits qualifying estates to defer a portion of their estate tax liability for up to 14 years from the date the tax is due (not the date of death). During the first four years of the deferment period, the estate pays interest only, set at only 2%, followed by 10 annual installments of principal and interest.
A deferral isn’t available for the total estate tax liability, unless a qualifying closely held business interest is the only asset in your estate. The benefit is limited to the portion of estate taxes that’s attributable to a closely held business.
Estate tax deferral is available if the value of an “interest in a closely-held business” exceeds 35% of your adjusted gross estate. To determine whether you meet the 35% test, you may only include assets actually used in conducting a trade or business — passive investments don’t count.
Active vs. passive ownership
To qualify for an estate tax deferral, a closely held business must conduct an active trade or business, rather than merely manage investment assets. Unfortunately, it’s not always easy to distinguish between the two, particularly when real estate is involved.
The IRS provided welcome guidance on this subject in a 2006 Revenue Ruling. The ruling confirms that a “passive” owner may qualify for an estate tax deferral, so long as the entity conducts an active trade or business. The ruling also clarifies that using property management companies or other independent contractors to conduct real estate activities doesn’t disqualify a business from “active” status, so long as its activities go beyond merely holding investment assets.
In determining whether a real estate entity is conducting an active trade or business, the IRS considers such factors as the amount of time owners, employees or agents devote to the business, whether the business maintains an office with regular business hours, and the extent to which owners, employees or agents are actively involved in finding tenants and negotiating leases.
Weigh your options
As you plan your estate, consider whether your family will be eligible to defer estate taxes. If you own an interest in a real estate business, you may have an opportunity to qualify it for an estate tax deferral simply by adjusting your level of activity or increasing your ownership in an entity that manages the property. Contact us for additional details.