Estate Planning Series for the 99 Percent: With No Estate Tax, Consider Income Tax, Financial and Personal Objectives

The majority of estates are not subject to federal estate tax when death occurs.  How is a client to plan, then, and what should planning be focused on? 

As the result of the 2017 Tax Cuts and Jobs Act, the applicable exclusion from the federal gift and estate tax is $11,580.00.  This number is indexed annually for inflation.  This amount sunsets after 2025 and will revert to the 2017 exclusion amount of $5,490,000.00 also as indexed for inflation (Code Section 2010 (c)(5).  If your estate falls under these thresholds you are referred to as a person of "moderate wealth" for purposes of planning.  The American Tax Relief Act of 2012 (ATRA) also made permanent the concept of portability, which allows the surviving spouse to use the unused federal estate tax exclusion of the deceased spouse who died after 2010.  Depending on the estate plan of the first deceased spouse and the year of death, portability can give the surviving spouse an available applicable exclusion for lifetime gifting and use at death of $23,160,000.00 is 2020.  The Generation Skipping Tax is not portable, and will be discussed in a separate section of this planning series. 

The Tax policy Center suggests that only 1,800 estates in the United States, or 1 in every 1, 400 people who die will pay any estate tax as of 2020.  

New Emphasis In Planning.  

If estate tax is no longer the issue for you, and for most, we can turn our focus to the other aspects of Estate Planning, such as income tax, financial objectives and personal objectives.  

Refocused Planning. 

The major focus for estate planning for married couples having assets under $22,36 million is core dispositive planning, income tax planning, such as achieving step up basis at death for assets, and the preservation and management of assets.  

Core Dispositive Planning. 

Planning should start with a review of your current personal and financial situation and an examination of your current plan and all associated documents.  Consideration at this stage of planning should consist of (a) the desired beneficiaries to whom assets should be given; (b) coordination  of beneficiary designations, which is required to achieve the desired result; (c) a review of your existing estate planning documents, if any, from a new perspective.  If you have no documents, that means you can also start with a new perspective.  

Review should be made of formula clauses in your current documents that may not make sense now.  Formulas referring to "maximum amounts that can pass without tax consequences" and other formulas may not be needed now because we have a different federal tax environment. 

A second question is what gifts have you made?  If the gift was made to a trust, how is the trust structured and how is it operating?  Are the trustees available and is that person named as the likely successor the right choice?  

Third, review of beneficiary designations of items that pass outside of a will, like life insurance policies, retirement plans and jointly held property, to make sure they are not held by a deceased person and in most instances, that there is a primary and second beneficiary.  See this review of how to own your bank accounts in Wyoming.  

Motivation for Planning.  

For a long time the main motivation for estate planning was to save taxes.  Now, estate tax savings has been largely or completely removed from the picture.  The focus now is on other aspects of planning that are of significant importance.  For example: 

  1. Planning for disposition of your assets at death; 
  2. Asset protection planning; 
  3. Planning for disability and incompetency; 
  4. Business succession planning;
  5. Planning for family relationship dissolutions; 
  6. Charitable giving, for its own sake and not for death tax savings.  Income tax considerations will still be relevant and techniques like lifetime charitable remainder trusts or gifts are worthwhile to consider as a way to use the charitable deduction.*  
  7. Life insurance planning 
  8. Retirement Planning.  The SECURE Act of 2019 has provided new rule for the "stretch out" of payment for the lifetimes of beneficiaries.  
  9. Planning for children with disabilities and special needs. 
  10. Planning for spendthrift children. 
  11. Planning for ownership of real property in more than one state. 
  12. Planning for the possible future decrease in the estate, gift and generation skipping tax exemptions. 
  13. Planning to pay for education expenses, including contributions to Code Section 529 plans.
  14. Identifying guardians for minor children as necessary. 
  15. Considerations for eldercare planning:
  • Durable power of attorney 
  • Health care directive 
  • More specific directives regarding gifting to protect against elder abuse 
  • Social Security benefit strategies 
  • Long term care insurance 

*Planning Suggestion:  Gifts to charity made at death in an estate that will not be subject to the federal estate tax gains have no tax benefit for your estate.  However, you can consider leaving property to children and have them promise to make the desired gifts to your favorite charities.  Your child can gain a valuable income tax deduction for doing so (Code Section 170).  If the children are not "trusted" to make the desired gifts to charity, you could instead create and fund a trust directed to make mandatory distributions of the trust income to charity over a number of years.  The Code Section 642(c) charitable deduction will offset the trust income and satisfy the charitable intent of the creator of the trust. 

Please call me at 307.200.1914 to have a free consultation regarding your estate plans and the various ways there are to achieve your goals.  (307.200.1914).