Will Inheritance and Gift Taxes Change in 2021? – Annapolis and Towson Estate Planning

Uncertainty is driving many wealth transfers, with gifting taking the lead for many wealthy families, reports the article “No More Gift Tax Exemption?” from Financial Advisor.  For families who have already used up a large amount or even all of their exemptions, there are other strategies to consider.

Making gifts outright or through a trust is still possible, even if an individual or couple used all of their gift and generation skipping transfer tax exemptions.  Gifts and generation skipping transfer tax exemption amounts are indexed for inflation, increasing to $11.7 million in 2021 from $11.58 million in 2020.  Individuals have $120,000 additional gift and generation-skipping transfer tax exemptions that can be used this year.

Annual exclusion gifts—individuals can make certain gifts up to $15,000 per recipient, and couples can give up to $30,000 per person.  This does not count towards gift and estate tax exemptions.

Do not forget about Grantor Retained Annuity Trust (GRAT) options. The GRAT is an irrevocable trust, where the grantor makes a gift of property to it, while retaining a right to an annual payment from the trust for a specific number of years.  GRATS can also be used for concentrated positions and assets expected to appreciate that significantly reap a number of advantages.

A Sale to a Grantor Trust takes advantage of the differences between the income and transfer tax treatment of irrevocable trusts.  The goal is to transfer anticipated appreciation of assets at a reduced gift tax cost.  This may be timely for those who have funded a trust using their gift tax exemption, as this strategy usually requires funding of a trust before a sale.

Intra-family loans permit individuals to make loans to family members at lower rates than commercial lenders, without the loan being considered a gift.  A family member can help another family member financially, without incurring additional gift tax.  A bona fide creditor relationship, including interest payments, must be established.

It is extremely important to work with a qualified estate planning attorney when implementing tax planning strategies, especially this year.  Tax reform is on the horizon, but knowing exactly what the final changes will be, and whether they will be retroactive, is impossible to know.  There are many additional techniques, from disclaimers, QTIPs and formula gifts, that an experienced estate planning attorney may consider when planning to protect a family legacy.

Reference: Financial Advisor (April 1, 2021) “No More Gift Tax Exemption?”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Your Estate Planning Checklist for 2021 – Annapolis and Towson Estate Planning

If you reviewed or created your estate plan in 2020, you are ahead of most Americans, but you are not done yet. If you created a trust, gave gifts of real estate, business interest or other assets, you need to address the loose ends and do the follow up work to ensure that your planning goals will be met. That is the advice from a recent article “Checklist 2020 Planning Follow Through: You Have More Work To Do” from Forbes.

Here are few to consider:

Did you loan money to heirs? If you made any loans to heirs or had any other loan transactions, you will need to calendar the interest payment dates and amounts and be sure that interest is paid promptly as described in the promissory notes. Correct interest payments are necessary for the IRS or creditors to treat the transaction as a real loan, otherwise you risk having the loan recharacterized or worse, being disregarded completely.

Did you create an irrevocable trust? If so, you need to be sure that gifts are made to the trust each year to fund insurance premiums. If the trust includes annual demand powers (known as “Crummey powers”) to allow gifts to qualify for the gift tax annual exclusion, written notices for 2020 gifts will need to be issued. This can be much more complicated than you expect: if you have transfers made to multiple trusts and outright gifts made directly to heirs, those gifts may need to be prioritized, based on the terms of the trusts and the dates of the gifts to determine which gifts qualify for the annual exclusion and which do not.

If you made gifts to a trust that is exempt from the generation skipping transfer tax (GST), you may have to file a gift tax return to allocate the GST exemption, so the trust remains GST exempt. Talk to your estate planning attorney to avoid any expensive mistakes.

Do you own life insurance? Or does a trust own life insurance for you? Either way, do not ignore your coverage after you have purchased a policy or policies. Your broker should review policy performance, the appropriateness of coverage for your plan, etc., every few years. If you did not do this in 2020, make it a priority for 2021. Many people create SLATS—Spousal Lifetime Access Trusts—so that their spouse benefits from the trusts. However, if your spouse dies prematurely, the SLAT no longer works.

Paying trustee fees. If you have institutional trustees, their fees need to be paid annually. If you pay the fees directly, the fee becomes an additional gift to the trust, requiring the filing of a gift tax for that year. If the trust pays the fee directly, there might not be a tax implication. Again, check with your estate planning attorney.

Did you make transfers to a trust with a disclaimer mechanism? If you made transfers to a trust that has a disclaimer mechanism and you want to reconsider the planning, it may be possible for beneficiaries or a trustee to disclaim gifts made to the trust within nine months of the transfer, thereby unwinding the planning.

Did you create any GRATs in 2020? If you created a Grantor Retained Annuity Trust, be certain that the trustee calendars the required annuity payments and that they are paid on a timely basis. Missing payments could put the GRAT status in jeopardy. You should also confirm also how the payment is calculated, which should be in the GRAT itself.

The best estate plan is one that is reviewed on a regular basis to ensure that it works, throughout changes that occur in law and life.

Reference: Forbes (Dec. 27, 2020) “Checklist 2020 Planning Follow Through: You Have More Work To Do”

 

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Estate Planning Actions to Consider before 2020 Ends – Annapolis and Towson Estate Planning

When it comes to estate planning, there is 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 is 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, do not 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 are 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”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

What is a GRAT and Does Your Family Need One? – Annapolis and Towson Estate Planning

As a result of the low interest rate environment, some families may have a federal estate tax problem and need planning to reduce their tax liability. A Grantor Retained Annuity Trust, known as a GRAT, is one type of planning strategy, as described in the article “Estate planning with grantor retained annuity trust” from This Week Community News.

What is a GRAT? It is a technique where an individual creates an irrevocable trust and transfers assets into the trust to benefit children or other beneficiaries. However, unlike other irrevocable trusts, the grantor retains an annuity interest for a number of years.

Here is an example. Let us say a person owns a stock of a closely held business worth $800,000. Their estate planning attorney creates a ten-year GRAT for them. The person transfers preferably non-voting stock in the closely held business to the GRAT, in exchange for the GRAT paying the person an annuity amount to the individual who established the GRAT for ten years.

The annuity amount payment means the GRAT pays the individual a set percentage of the amount of the initial assets contributed to the GRAT over the course of the ten-year period.

Let us say the percentage is a straight ten percent payout every year. The amount paid to the individual would be $80,000. At the end of the five-year period, the grantor would have already received an amount back equal to the entire amount of the initial transfer of assets to the GRAT, plus interest.

At the end of the ten-year term, the asset in the trust transfers to the individual’s beneficiaries. If the GRAT has grown greater than 1%, then the beneficiaries also receive the growth. The GRAT makes the annuity payment with the distribution of earnings received from the closely held business, which is likely to be an S-Corp or a limited liability company taxed as a partnership. Assuming the distribution received is greater than the annuity payment, the GRAT uses cash assets to make the annuity payment. For the planning to work, the business must make enough distributions to the GRAT for it to make the annuity payment, or the GRAT has to return stock to the individual who established the GRAT.

There are pitfalls. If the individual dies before the term of the GRAT ends, the entire value of the assets is includable in the estate’s assets and the technique will not have achieved any tax benefits.

If the plan works, however, the stock and all of the growth of the stock will have been successfully removed out of the individual’s estate and the family could save as much as 40% of the value of the stock, or $320,000, using the example above.

It is possible to structure the entire transaction, so there is no gift tax consequence to the grantor. If the person is concerned about estate taxes or the possible change in the federal estate tax exemption, which is due to sunset in 2026, then a GRAT could be an excellent part of an estate plan. When the current estate tax exemption ends, it may return from $11.58 million to $5 or $6 million. It could even be lower than that, depending on political and financial circumstances. Planning now for changes in the future is something to consider and discuss with your estate planning attorney.

Reference: This Week Community News (Sep. 6, 2020) “Estate planning with grantor retained annuity trust”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

How Can I Protect Assets from Creditors? – Annapolis and Towson Estate Planning

Forbes’ recent article entitled “Three Estate Planning Techniques That Protect Your Assets From Creditors” explains that the key to knowing if your assets might be susceptible to attachment in litigation is the fraudulent conveyance laws. These laws make a transfer void, if there is explicit or constructive fraud during the transfer. Explicit fraud is when you know that it is likely an existing creditor will try to attach your assets. Constructive fraud is when you transfer an asset, without receiving reasonably equivalent consideration. Since these laws void the transfer, a future creditor can attach your assets.

Getting reasonably equivalent consideration for a transfer of assets will eliminate the transfer being treated as constructive fraud. Reasonably equivalent consideration includes:

  • Funding a protective trust at death to provide for your spouse or children
  • Asset transfer in return for interest in an LLC or LLP; or
  • A transfer that exchanges for an annuity (or other interest) that protects the principal from claims of creditors.

Limited Liability Companies (LLCs) can be an asset protection entity, because when assets are transferred into the LLC, your creditors have limited rights to get their hands on them. Like a corporation, your interest in the LLC can be attached. However, you can place restrictions on the sale or transfer of interests that can decrease its value and define the term by which sale proceeds must be paid out. An LLC must be treated as a business for the courts to treat them as a business. Thus, if you use the LLC as if it were your personal property, courts will disregard the LLC and treat it as personal property.

Annuities are created when you exchange assets for the right to get payment over time. Unlike annuities sold by insurance companies, these annuities are private. These annuities are similar to insurance company annuities, in that they have some income tax consequences, but protect the principal against attachment.

You can also ask an experienced estate planning attorney about trusts that use annuities, which are called split interest trusts. There is a trust where you (the Grantor) give assets but keep the right to receive payments, which can be a fixed amount annually with a Grantor Retained Annuity Trust (or GRAT.)

Another trust allows you to get a variable amount, based on the value of the assets in the trust each year. This is a Grantor Retained Uni-Trust or GRUT. If the assets are vacant land or other tangible property, or being gifted to someone who is not your sibling, parent, child, or other descendant, you can keep the income from the assets by using a Grantor Retained Income Trust (or GRIT).

Along with a trust where you make a gift to an individual, you can protect the trust assets and get a charitable deduction, if you make a gift to charity through trusts. There are two types of trust for this purpose: a Charitable Remainder Trust (CRT) lets you keep an annuity or a variable payment annually, with the remainder of the trust assets going to charity at the end of the term; and a Charitable Lead Trust (CLT) where you give a fixed of variable annuity to charity for a term and the remainder either back to you or to others.

To get the most from your asset protection, work with an experienced estate planning attorney

Reference: Forbes (June 25, 2020) “Three Estate Planning Techniques That Protect Your Assets From Creditors”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

How Can We Do Estate Planning in the Pandemic? – Annapolis and Towson Estate Planning

We can see the devastating impact the coronavirus has had on families and the country. However, if we let ourselves dwell on only a few areas of our lives that we can control, the pandemic has given us some estate and financial planning opportunities worth evaluating, says The New Hampshire Business Review’s recent article entitled “Estate planning in a crisis.”

Unified Credit. The unified credit against estate and gift tax is still a valuable estate-reduction tool that will probably be phased out. This credit is the amount that a person can pass to others during life or at death, without generating any estate or gift tax. It is currently $11,580,000 per person. Unless it is extended, on January 1, 2026, this credit will be reduced to about 50% of what it is today (with adjustments for inflation). It may be wise for a married couple to use at least one available unified credit for a current gift. By leveraging a unified credit with advanced planning discount techniques and potentially reduced asset values, it may provide a very valuable “once in a lifetime” opportunity to reduce future estate tax.

Reduced Valuations. For owners of closely-held companies who would like to pass their business to the next generation, there is an opportunity to gift all or part of your business now at a value much less than what it would have been before the pandemic. A lower valuation is a big plus when trying to transfer a business to the next generation with the minimum gift and estate taxes.

Taking Advantage of Low Interest Rates. Today’s low rates make several advanced estate planning “discount” techniques more attractive. This includes grantor retained annuity trusts, charitable lead annuity trusts, intra-family loans and intentionally defective grantor trusts. The discount element that many of these techniques use, is tied to the government’s § 7520 rate, which is linked to the one-month average of the market yields from marketable obligations, like T-bills with maturities of three to nine years. For many of these, the lower the Sect. 7520 rate, the better the discount the technique provides.

Bargain Price Transfers. The reduced value of stock portfolios and other assets, like real estate, may give you a chance to give at reduced value. Gifting at today’s lower values does present an opportunity to efficiently transfer assets from your estate, and also preserve estate tax credits and exclusions.

Reference: New Hampshire Business Review (May 21, 2020) “Estate planning in a crisis”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys