As we enter the last quarter of 2020, many people are anxious to put this crazy year in the past. Between a global pandemic, multiple hurricanes, and an uninspired start to LSU’s football season, it’s understandable that many want 2021 to begin as soon as possible. While the new year will arrive soon, there are some tax considerations to examine before the remaining months of 2020 slip away. One of the many tax opportunities to think about is estate tax planning.
While estate taxes only affect a small fraction of the US population, they can create a substantial tax burden for those taxpayers who are subject to them. The current tax code provides one of the most generous exemptions available since the estate tax was implemented in 1916. The estate tax exemption for 2020 is $11,580,000. In addition, the estate tax exemption is portable between spouses. This means that a married couple can avoid estate taxes completely if their total estate is less than $23,160,000.
The current tax code provides one of the most generous exemptions available since the estate tax was implemented in 1916.
The tax code has only recently allowed such large estates to pass through to the heirs without paying any estate tax. The Tax Cuts and Jobs Act (TCJA), passed in late 2017, increased the estate tax exemption to its current amount. Prior to the passage of the TCJA, the estate tax exemption was capped as high as $5.4 million per individual and as low as $1 million per individual in recent years. The rate of tax paid on estates has decreased in recent years as well. The estate tax rate is currently 40% of the taxable value of the estate --10% lower than the estate tax rate was in 2002.
Considering the historically generous provisions, and the looming presidential election, taxpayers who may be subject to estate taxes should consider the current value of their estate and the planning opportunities available. If Congress reduces the estate tax exemption back to pre-TCJA levels, many more taxpayers are likely to have an estate tax obligation. Even the current expansion under the TCJA is set to expire in 2025 and revert back to previous levels.
One of the most common estate planning tools is to transfer assets out of the estate to reduce estate value at death. Depending on specific circumstances, taxpayers have been concerned that such transfers may not be respected in light of a legislative change. However, in November 2019, the IRS published final regulations offering guidance on this topic. These regulations included “anti-clawback” provisions. Essentially, the IRS state that if a taxpayer makes large gifts under current law and the estate tax exemption reverts to a lower level in a subsequent year, the IRS will not tax the excess gifts made in prior years. These regulations provide the certainty taxpayers need when considering estate planning opportunities.
Taxpayers may also be considering the value of their assets and the impact of COVID-19. Even if the pandemic has negatively impacted estate value, some taxpayers may still have the opportunity to transfer assets using depressed values. If certain assets are expected to appreciate to pre-pandemic levels in the coming years, these assets are prime for transferring out of the estate. By using the current fair market value, these taxpayers can transfer a greater amount to the next generation than would have been possible using pre-pandemic valuations.
Estate tax planning is extremely complex and there are many options to achieve your goals. If you are concerned with your current estate and considering your options, reach out to your P&N advisor before the end of the year. 2020 doesn’t have to be all bad, at least from a tax perspective.