Read more about the article How Does Estate Planning Work for Caregiving Children? Annapolis and Towson Estate Planning

How Does Estate Planning Work for Caregiving Children? Annapolis and Towson Estate Planning

This situation requires considered estate planning to protect the arrangement, both for the parent and child, in the event of the parent’s incapacity and what may happen, if and when the parent needs to move to a care facility and/or passes away.

If the child is caring for the parent at the parent’s home, the parent’s estate planning often gives the child the ability to remain at the parent’s residence. It may also allow the child to access the parent’s bank accounts, if the parent becomes mentally incapacitated. A recent article from Lake County Record-Bee, “Estate planning for parents with caregiver children,” says if the planning is not done correctly, a series of unintended problems may arise, including disagreements with other family members and allegations of elder abuse, especially financial abuse.

Agreed-upon terms of any living arrangement should be included in the parent’s estate planning documents. If the parent has a living trust, the trust may allow the child to remain in the family home, so the document must clearly state the terms of the living arrangement. If the parents live in a rental property, the POA may be used to authorize the child’s continued occupancy and use of the parent’s money to pay household expenses. The rental agreement would need to include the child as a tenant.

What if the parent lives in the child’s home? The child’s estate plan would need to reflect on what terms the parent may remain in the child’s house, if the child were to become incapacitated or die unexpectedly. Consideration would also need to be given to how the parents receive care.

If the parent dies or moves into a nursing home or when the child moves out, the arrangement ends. What happens next? It depends on the situation. The parent may leave the residence to the adult care giver child. The following also to be addressed: how are expenses, including the mortgage, to be paid and is there an expressed transition period before the child moves out?

If the parent intends to leave the family home to the adult care giver, the estate planning documents need to gift the residence to the adult caregiver. This may include lifetime gifting, or it may entail renting the residence to provide income for the parent’s needs.

If there are siblings, or a spouse from a second marriage, the estate planning documents need to say whether and how other family members participate in the residence. The parents may want to gift the residence to all children, subject to an exclusive life estate for the care giver to live in the family home. When the care giver child becomes incapacitated or dies, the family home is usually sold, and the sale proceeds divided between the parent’s living descendants.

Something to be careful about: if the caregiver child is treated more favorably than siblings. While the parents are entitled to make their own decisions about how to distribute assets, a disgruntled sibling may object to how assets are distributed. An estate planning attorney will be able to formally document the parent’s wishes and prepare the estate for any challenges.

Finally, if no advance planning is done, it is possible the parent may end up needing a guardian and conservator to care for their finances and their well-being, respectively, if they become incapacitated. This becomes an expensive situation, and the result of court-supervised administrators may not agree with how the parent wished their affairs to be handled.

Contact us to review your estate plans with one of our experienced estate planning attorneys.

Reference: Lake County Record-Bee (Feb. 4, 2023) “Estate planning for parents with caregiver children”

 

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

Read more about the article Giving to My Favorite Charity in Estate Plan – Annapolis and Towson Estate Planning

Giving to My Favorite Charity in Estate Plan – Annapolis and Towson Estate Planning

If you’d like to leave some or all of your money to a charity, Go Banking Rates’ recent article entitled “How To Leave Your Inheritance to an Organization” provides what you need to know about charitable giving as part of your estate plan.

  1. Make Sure the Organization Accepts Donations. Unless you have a formal agreement with the charity stating they’ll accept the inheritance, the confirmation isn’t a binding commitment. As a result, you should ask the organization if there’s any form language that they may want you to add to your will or trust as part of a specific bequest. If the charity isn’t currently able to accept this kind of donation, look at what they will accept or if other charities with a similar mission will accept it.
  2. Set the Amount You Want the Charity To Receive. Some people want to leave the estate tax exemption — the maximum amount that can pass without tax — to individuals and leave the rest to charity. Because the estate tax exemption is subject to change and the value of your assets will change, the amount the charity will get will probably change from when the planning is completed.
  3. Have a Plan B in the Event that the Charity Doesn’t Exist After Your Death. Meet with your estate planning attorney and decide what happens to the bequest if the organization you’re donating to no longer exists. You may plan ahead to pass along the inheritance to another organization and make sure it receives the funds. You could also have the inheritance go back into the general distributions in your will.
  4. State How You Want Your Gift to Be Used. If there is a certain way that you’d like the charity to use the inheritance, you can certainly inquire with the organization and learn more. Find out if the charity accepts this type of restriction, how long it may last and what happens if the charity no longer uses it for this purpose.

As you draft charitable planning provisions, make sure you do so alongside an experienced estate planning attorney.

The provisions in your will should be specific about your desires and provide enough flexibility to your personal representative, executor, or trustee to be modified based on the conditions at the time of your death.

Contact us to review your estate plan with one of our experienced estate planning attorneys.

Reference: Go Banking Rates (August 26, 2022) “How To Leave Your Inheritance to an Organization”

 

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

Read more about the article What Happens When Gift and Estate Tax Exemptions Change? – Annapolis and Towson Estate Planning

What Happens When Gift and Estate Tax Exemptions Change? – Annapolis and Towson Estate Planning

The federal lifetime gift and estate tax exclusion will increase for inflation in 2023 to $12.93 million.  There may be similar increases for inflation in 2024 and 2025, according to a recent article from Think Advisor titled “The Estate and Gift Tax Exclusion Shrinks in 2026. What’s an Advisor to Do?”

This is the good news for wealthy Americans. However, there’s bad news in the near future. Under the Tax Cuts and Jobs Act, these historically high levels will end on December 31, 2025. Estate and gift exclusions will drop to the pre-2017 level of $5 million, adjusted for inflation. Estimates for 2026 vary, but most expect the amount may reach $6.8 million per person.

For Americans who saw the value of their homes and portfolios increase in the last ten years, this level becomes uncomfortably close when considering the overall value of their estate. Here’s some help on how to minimize estate taxes in coming years.

What is the Estate and Gift Tax Exclusion in 2023?

Every year the annual estate and gift tax exclusion is adjusted for inflation. Gifts at or below this amount are not counted towards your lifetime exemption. For example, in 2022, the annual exclusion was $16,000 and in 2023, it is $17,000.

If you haven’t made any gifts to remove assets from your estate before 2026, your lifetime gift and estate tax exemption will revert to 2026 levels. If you made gifts prior to 2026, several different scenarios may apply.

If the amount of your gift was less than the exemption amount in place in 2026 or beyond, your remaining exclusion will be the amount of the exemption minus the amount of your lifetime gifts. Let’s say the exclusion is $6.8 million and you’ve given $3 million in lifetime gifts. The remaining exclusion would be $3.8 million. Any gifts over this amount would be subject to estate taxes.

If the amount of your gifts before 2026 exceeded the limit in place, the exemptions from the old limits will apply to those gifts. However, there won’t be any additional exemptions. Here’s an example: if you made $9 million in gifts before 2026, this would be your exemption amount upon your death. There would be no additional exemption for 2026 or beyond, unless the inflation-adjusted exemption exceeded $9 million in the future.

To be blunt, the higher exemption amounts in place are “use it or lose it.” Any difference between the higher exemption amounts and the post-2025 reduced amounts will be lost if not used. Any gifts made in excess of the higher exemptions in place before 2026 will still fall under the higher exemption upon death.

There are steps to be taken to reduce your taxable estate and make the most of the current limits. Which steps to take depends on the size of the estate, the nature of heirs, marital status, health status and other factors.

One strategy is to spend down assets. Take the big vacations, travel to out-of-town sporting events, enjoy the wealth you worked so hard to accumulate. This lifestyle can add up over time and fit in with an overall plan of minimizing your taxable estate.

Gifting to charity is another excellent way to reduce the size of a taxable estate while building a legacy. Current-year gifts of cash appreciated securities and other assets can provide a tax deduction to also reduce current year income taxes. Contact us to speak with one of our experienced estate planning attorneys about using a Donor Advised Fund, Charitable Lead Trust, or Charitable Remainder Trust.

If you are married, assets left to a surviving spouse have no estate tax consequences, except for a non-citizen spouse, who may not benefit from the unlimited marital deduction rules. One option is for the surviving spouse to elect to take the decedent spouse’s unused lifetime exclusion.

Reference: Think Advisor (Dec. 7, 2022) “The Estate and Gift Tax Exclusion Shrinks in 2026. What’s an Advisor to Do?”

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

Read more about the article Do Unified Credit Gift Tax Exclusions Work? – Annapolis and Towson Estate Planning

Do Unified Credit Gift Tax Exclusions Work? – Annapolis and Towson Estate Planning

Most people know they pay taxes on earnings and when money grows. However, there are also taxes when money or other assets are given away or passed to another after death. The unified tax credit is central to estate planning, says a recent article titled “What Are The Unified Credit’s Gift Tax Exclusions?” from yahoo!.

First, what is the Unified Tax Credit? Sometimes called the “unified transfer tax,” the unified tax credit combines two separate lifetime tax exemptions. The first is the gift tax exclusion, which concerns assets given to other individuals during your lifetime. The other is the estate tax exemption, which is the value of an estate not subject to taxes when it is inherited. Your estate or heirs will only pay taxes on the portion of assets exceeding this threshold.

The unified tax credit is an exemption applied both to taxable gifts given during your lifetime and the estate you plan to leave to others.

If you would rather gift with warm hands while living, you can pull from this unified credit and avoid paying additional taxes on monetary gifts in the year you gave them. However, if you’d rather keep your assets and distribute them after death, you can save the unified credit for after death. You can also use the unified tax credit to do a little of both.

The unified tax credit changes regularly, depending on estate and gift tax regulations. The gift and estate tax exemptions doubled in 2017, so the unified credit right now sits at $12.06 million per person in 2022. This will expire at the end of 2025, when credits will drop down to lower levels, unless new legislation passes.

Up to 2025, a married couple can give away as much as $24.12 million without having to pay additional taxes. The recipient of this generous gift would not have to pay additional taxes either. If you consider the rate of estate taxes—40%—optimizing this unified tax credit means a lot more money stays in your loved one’s pockets.

How does it work? Let’s say you have four children and each one is going to receive a taxable gift of $500,000. You can pull from your unified tax credit the same year you give these gifts. This way, there’s no need for you to pay gift taxes on the $2 million.

However, this generosity will reduce your lifetime unified credit from $12.06 million to $10.06 million. If you die and leave an estate worth $11.5 million, your heirs will need to pay estate taxes on the $1.44 million difference.

At current estate tax rates, roughly $700,000 would go to the IRS, or more, depending upon your state!

The unified tax credit doesn’t take into account or apply to annual gift exclusions. These annual exclusions allow you to give away even more money during your lifetime and it doesn’t count against your unified limit. As of 2022, taxpayers may give $16,000 per year to any individual as a tax-exempt gift. You can give $16,000 to as many people as you wish each year without being subject to gift taxes. This is a simple way to gift with warm hands without paying gift taxes or reducing the unified limit. The annual gift is per person, so if you are married, you and your spouse may give, $32,000 per year to as many people as you want, and the gift is excluded.

Taxable gifts exceeding the annual gift exclusion amount must be properly documented and should be done in concert with your overall estate plan. They offer great tax advantages, and perhaps more importantly, provide the giver with the joy of seeing their wealth translate into a better life for their loved ones.

Reference: yahoo! (Nov. 18, 2022) “What Are The Unified Credit’s Gift Tax Exclusions?”

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

Are You Ready for 2026? – Annapolis and Towson Estate Planning

You may not be thinking about Jan. 1, 2026. Any New Year’s Eve celebrations being planned now are more likely to concern Jan. 1, 2023. However, if your estate is worth $5 million or more when the first day of 2026 arrives, your estate planning should begin now. According to a recent article from Forbes, “Is 2026 An Important Year For Your Wealth?,” the reduction in the estate tax exemption will revert to the 2010 level of $5 million adjusted for inflation. It could go even lower. With federal tax rates on estates over the exemption level set at 40%, plus any state estate or inheritance taxes, planning needs to be done in advance.

Considering the record levels of national debt and government spending, it’s unlikely these exemptions will remain the same. Now is the time to maximize today’s high estate tax exemption levels to minimize federal estate taxes and maximize what will be left to heirs.

Your estate planning attorney will have many different strategies and tools to achieve these goals. One is the Spousal Lifetime Access Trust (SLAT). This is an irrevocable trust created by each spouse, known as the grantors, for the benefit of the other spouse. Important note: to avoid scrutiny, the trusts must not be identical.

Each trust is funded by the grantor in an amount up to the current available tax exemption. Today, this is $12.06 million each (or a total of $24.12 million) without incurring a gift tax.

This serves several purposes. One is removing the gifted assets from the grantor’s estate. The assets and their future growth are protected from estate taxes.

The spousal beneficiary has access to the trust income and/or principal, depending upon how the trust is created, if they need to tap the trust.

The trust income may be taxed back to the grantor instead of the trust. This allows the assets in the trust to grow tax-free.

Remainder beneficiaries, who are typically the grantor’s children, receive the assets at the termination of the SLAT, usually when the beneficiary spouse passes away.

The SLAT can be used as a generation-skipping trust, if this is the goal.

The SLAT is a useful tool for blended families to avoid accidentally disinheriting children from first (or subsequent) marriage. Remainder assets can be distributed to named beneficiaries upon the death of the spouse.

The SLAT is an irrevocable trust, so some control needs to be given up when the SLATs are created. Couples using this strategy need to have enough assets to live comfortably after funding the SLATS.

Why do this now, when 2026 is so far away? The SLAT strategy takes time to implement, and it also takes time for people to get comfortable with the idea of taking a significant amount of wealth out of their control to place in an irrevocable trust. For a large SLAT, estate planning attorneys, CPAs and financial advisors generally need to work together to create the proper structure. Executing this estate planning strategy takes time and should not be left for the year before this large change in federal estate taxes occurs.

Contact us to begin planning your SLAT strategy with one of our experienced estate planning attorneys today.

Reference: Forbes (Oct. 4, 2022) “Is 2026 An Important Year For Your Wealth?”

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

How Does Probate Court Work? – Annapolis and Towson Estate Planning

Probate court is where wills are examined to be sure they have been prepared according to the laws of the state and according to the wishes of the person who has died. It is also the jurisdiction where the executor is approved, their activities are approved, all debts are paid, and assets are distributed properly. According to a recent article from Investopedia “What is Probate Court?,” this is also where the court determines how to distribute the decedent’s assets if there is no will.

Probate courts handle matters like estates, guardianships and wills. Estate planning lawyers often manage probate matters and navigate the courts to avoid unnecessary complications. The probate court process begins when the estate planning attorney files a petition for probate, the will and a copy of the death certificate.

The probate court process is completed when the executor completes all required tasks, provides a full accounting statement to the court and the court approves the statement.

Probate is the term used to describe the legal process of handling the estate of a recently deceased person. The role of the court is to make sure that all debts are paid, and assets distributed to the correct beneficiaries as detailed in their last will and testament.

Probate has many different aspects. In addition to dealing with the decedent’s assets and debts, it includes the court managing the process and the actual distribution of assets.

Probate and probate court rules and terms vary from state to state. Some states don’t even use the term probate, but instead refer to a surrogate’s court, orphan’s court, or chancery court. Your estate planning attorney will know the laws regarding probate in the state where the will is to be probated before death if you’re having an estate plan created, or after death if you are the beneficiary or the executor.

Probate is usually necessary when property is only titled in the name of the decedent. It could include real property or cars. There are some assets which do not go through probate and pass directly to beneficiaries. A partial list includes:

  • Life insurance policies with designated beneficiaries
  • Pension plan distribution
  • IRA or 401(k) retirement accounts with designated beneficiaries
  • Assets owned by a trust
  • Securities owned as Transfer on Death (TOD)
  • Wages, salary, or commissions owed to the decedent (up to the set limits)
  • Vehicles intended for the immediate family (this depends on state law)
  • Household goods and other items intended for the immediate family (also depending upon state law).

Many people seek to avoid or at least minimize the probate process. This needs to be done in advance by an experienced estate planning attorney. They can create trusts, assign assets to the trust and designate beneficiaries for those assets. Another means of minimizing probate is to gift assets during your lifetime.  If you are interested in avoiding probate, contact us to speak with one of our experienced estate planning attorneys.

Reference: Investopedia (Sep. 21, 2022) “What is Probate Court?”

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

Can You Gift Money on Your Deathbed? – Annapolis and Towson Estate Planning

A new case out of Tax Court centers on the question of when a “deathbed gift” is considered acceptable for estate and gift tax purposes. The powerful tax law provisions used to help many taxpayers avoid federal estate tax, or reduce it to a manageable size, makes this an important decision, especially as we draw closer to a time when estate tax exemption is likely to return to a far lower number.

The two tax law provisions, described in the article “Tax Court Says When Deathbed Gifts Are Complete” from accounting WEB, are the following:

Annual gift tax exclusion. A taxpayer may give gifts to recipients under the annual gift tax exclusion without incurring any gift taxes. The exclusion, indexed for inflation in $1,000 increments, is $16,000 per recipient in 2022. It’s doubled to $32,000 for joint gifts made by a married couple. Estates can be reduced significantly with planned use of the annual gift tax exclusion. For instance, if a taxpayer and a spouse give the maximum $16,000 to five relatives for five years in a row, they will have transferred $800,000 ($32,000 x 5 x 5) out of their estate, free of taxes.

Unified estate and gift tax exemption. In addition to the annual gift exemption, gifts may be sheltered from tax by the unified estate and gift tax exemption. As of this writing, the exemption is $10 million, indexed for inflation, which brings it to $12.06 million in 2022. It is scheduled to drop to $5 million, plus inflation indexing, in 2026.

Using the exemption during the taxpayer’s lifetime reduces the available estate shelter upon death. These two provisions give even very wealthy taxpayers a great deal of flexibility regarding liquid assets.

The new case came about as a result of a resident of Pennsylvania, who executed a Power of Attorney (POA) in 2007, appointing his son as his agent. The son was authorized to give gifts in amounts not exceeding the annual gift tax exclusion. From 2007 to 2014, the son arranged annual gifts to his siblings and other family members, in accordance with the POA.

The father’s health began to fail in 2015 and he passed away on September 11. On September 6, five days before he died, the son wrote eleven checks, totaling $464,000 from the father’s investment account.

Some recipients deposited the checks before the decedent’s death, but others did not. Only one check was paid by the investment account before the decedent’s death.

The question before the Tax Court: are the gifts complete and removed from the decedent’s estate?

According to the IRS, any checks deposited before death should be excluded from the taxable estate, but the Tax Court looked to the state’s law to determine the outcome of the other checks. The Tax Court ruled the checks not deposited in time must be included in the decedent’s taxable estate.

The estate planning lesson to be learned? Timing matters. If checks are written as part of the plan to minimize taxes, they must be deposited promptly to ensure they will be considered as gifts and reduce the taxable estate.

Reference: accounting WEB (Aug. 26,2022) “Tax Court Says When Deathbed Gifts Are Complete”

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

Will Making a Gift Conflict with Medicaid? – Annapolis and Towson Estate Planning

People usually make gifts for three reasons—because they enjoy giving gifts, because they want to protect assets, or minimize tax liability. However, gifting in one’s elder years can have expensive and unintended consequences, as reported in the article “IRS standards for gifting differ from Medicaid” from The News-Enterprise.

The IRS gift tax becomes expensive, if gifts are large. However, each individual has a lifetime gift exemption and, as of this writing, it is $12.06 million, which is historically high. A married couple may make a gift of $24.12 million. Most people don’t get anywhere near these levels. Those who do are advised to do estate and tax planning to protect their assets.

The current lifetime gift tax exemption is scheduled to drop to $5.49 million per person after 2025, unless Congress extends the higher exemption, which seems unlikely.

The IRS also allows an annual exemption. For 2022, the annual exemption is $16,000 per person. Anyone can gift up to $16,000 per person and to multiple people, without reducing their lifetime exemption.

People often confuse the IRS annual exclusion with Medicaid requirements for eligibility. IRS gift tax rules are totally different from Medicaid rules.

Medicaid does not offer an annual gift exclusion. Medicaid penalizes any gift made within 60 months before applying to Medicaid, unless there has been a specific exception.

For Medicaid purposes, gifts include outright gifts to individuals, selling property for less than fair market value, transferring assets to a trust, or giving away partial interests.

The Veterans Administration may also penalize gifts made within 36 months before applying for certain VA programs based on eligibility.

Gifting can have serious capital gains tax consequences. Gifts of real estate property to another person are given with the giver’s tax basis. When real property is inherited, the property is received with a new basis of fair market value.

For gifting high value assets, the difference in tax basis can lead to either a big tax bill or big tax savings. Let’s say someone paid $50,000 for land 40 years ago, and today the land is worth $650,000. The appreciation of the property is $600,000. If the property is gifted while the owner is alive, the recipient has a $50,000 tax basis. When the recipient sells the property, they will have to pay a capital gains tax based on the $50,000.

If the property was inherited, the tax would be either nothing or next to nothing.

Asset protection for Medicaid is complicated and requires the experience and knowledge of an elder law attorney. What worked for your neighbor may not work for you, as we don’t always know all the details of someone else’s situation.

Reference: The News-Enterprise (Aug. 6, 2022) “IRS standards for gifting differ from Medicaid”

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

Pay Attention to Income Tax when Creating Estate Plans – Annapolis and Towson Estate Planning

While estate taxes may only be of concern for mega-rich Americans now, in a relatively short time, the federal exemption rate is scheduled to drop precipitously. Estate planning underway now should include consideration of income tax issues, especially basis, according to a recent article titled “Be Mindful of Income Tax in Estate Planning, Particularly Basis” from National Law Journal.

Because of these upcoming changes, plans and trusts put into effect under current law may no longer efficiently work for income tax and tax basis issues.

Planning to avoid taxes has become less critical in recent years, when the federal estate tax exemption is $10 million per taxpayer indexed to inflation. However, the new tax laws have changed the focus from estate tax planning to coming tax planning and more specifically, to “basis” planning. Ignore this at your peril—or your heirs may inherit a tax disaster.

“Basis” is an often-misunderstood concept used to determine the amount of taxable income resulting when an asset is sold. The amount of taxable income realized is equal to the difference between the value you received at the sale of the asset minus your basis in the asset.

There are three key rules for how basis is determined:

Purchased assets: the buyer’s basis is the investment in the asset—the amount paid at the time of purchase. Here is where the term “cost basis” comes from.

Gifts: The recipient’s basis in the gift property is generally equal to the donor’s basis in the property. The giver’s basis is viewed as carrying over to the recipient. This is where the term “carry over basis” comes from, when referring to the basis of an asset received by gift.

Inherited Assets: The basis in inherited property is usually set to the fair market value of the asset on the date of the decedent’s death. Any gains or losses after this date are not realized. The heir could conceivably sell the asset immediately and not pay income taxes on the sale.

The adjustment to basis for inherited assets is usually called “stepped up basis.”

Basis planning requires you to review each asset on its own, to consider the expected future appreciation of the asset and anticipated timeline for disposing the asset. Tax rates imposed on income realized when an asset is sold vary based on the type of asset. There is an easy one-size-fits-all rule when it comes to basis planning.

Estate planning requires adjustments over time, especially in light of tax law changes. Speak with your estate planning attorney, if your estate plan was created more than five years ago. Many of those strategies and tools may or may not work in light of the current and near-future tax environment.

Reference: National Law Review (July 22, 2022) “Be Mindful of Income Tax in Estate Planning, Particularly Basis”

 

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

Is Your Estate Plan Ready for Tax Changes? – Annapolis and Towson Estate Planning

After December 1, 2025, the federal estate tax exemption will fall back to $5 million (indexed for inflation) from the current $12 million level. Now is the time to use available estate planning strategies and ensure that your plan factors in changes in tax law, advises a recent article titled “Are Clients’ Current Estate Plans Soundproof for the Future?” from Financial Advisor.

For many families, structured and leveraged gifting is one of the most useful wealth transfer vehicles. A parent could use their GST and gift tax exemptions to make gifts to children, grandchildren and other family members before this tax law changes.

Here is an example, using a high-net-worth family. Bill and Sue are married, so they can make combined lifetime gifts of $24,120,000. They own a family business worth $10 million in equal shares. They transfer 20% of the business to their children. This is a minority stake, meaning the minority owners have no right to make relevant business decisions and vote on important issues. As a result, the minority stake is discounted and worth $1.3 million instead of $2 million for gift and estate tax purposes and Bill and Sue retain $700,000 more of their allotted exemption.

For lifetime transfers, the valuation date is the date of the gifting, but for transfers at death, the valuation date is the date of death. By using this valuation discount while they are living, Bill and Sue have reduced the value of their company for estate tax purposes, giving their children a percentage of the company in a manner costing less in terms of transfer tax.

By making these gifts in 2022, Bill and Sue have removed $24,120,000 from their estate tax free. They have also removed the appreciation on the assets gifted away from their estate. However—if the gift is not made and the federal estate tax exemption reduces to $6 million per person before their deaths in 2040, then when the second spouse dies, heirs or beneficiaries will receive significantly less than what they would have received if the gift was made prior to the reduction of the federal exemption.

There was concern about tax outcomes if the taxpayer makes gifts now and the exemptions are reduced sooner. However, the IRS Treasury Decision 9884 confirms there will be no claw backs under these circumstances.

If the parents are concerned about making outright gifts to chosen beneficiaries who are too young, immature, or vulnerable to creditors, other strategies can be used to allow them to maintain control, while protecting assets and locking in these estate and gift tax advantages. The grantor can execute a plan ensuring that the donor receives an income from the transferred asset and/or maintaining access to principal.

Speak with an experienced estate planning attorney to learn what strategies are available now to prevent overly burdensome estate taxes in the future. After all, 2025 is not as far away as it seems.

Reference: Financial Advisor (June 8, 2022) “Are Clients’ Current Estate Plans Soundproof for the Future?”

 

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