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How Much Money to Give Away with Upcoming Tax Changes?

With inflation, the current federal estate tax exemption amount, which you can have when you die without paying federal estate tax, increased to $12.92 million for individuals for 2023. That’s up from $12.06 million in 2022. It will jump to $25.84 million for couples in 2025, up from $24.12 million in 2024. However, those rates sunset at the end of 2025. Without action from Congress, the exemptions will revert to the levels in place before the 2018 Tax Cuts and Jobs Act increased them. That’s about half the amount the exemption has grown to by then due to inflation, says Microsoft’s recent article entitled, “If I have $10 million, how much should I give away while I’m alive?”

Few families have faced federal estate taxes in the last few years, as the IRS has seen about 1200 taxable-estate returns in 2020. However, more families would have to look at the effect of estate taxes if the exemption went back down to $6.5 million per individual. A total of 17 states and the District of Columbia also have their own estate tax and inheritance thresholds. While a number like $6.5 million sounds big, it’s really now just a healthy 401(k) and a nice house in a big city

If you have something like $10 million, and you decide that giving away $3.5 M is the best tax scenario for your estate, you probably aren’t going to write a check. You’ll be looking into trusts and other advanced estate planning techniques that require the help of an experienced estate planning attorney. Those take time, and there’s no way to push them to a December 31, 2025 deadline.

One reason you’d want to give money away while you’re alive is to lower the size of your estate when you die, which would minimize taxes. If you have assets above the exemption limit set by the IRS, the federal tax will likely be 40% on the amount over that limit. There are a number of ways to give away a significant amount of money to lower the value of your estate. People hesitate because most of those options are irrevocable, so you can’t change your mind later.

An issue is using up your exemption by giving away money. If you have $10 million and pass away after the exemption goes down, you’d owe federal estate tax on the $3.5 million difference. If you had given away that $3.5 million before the end of 2025, you’d have a $3 million exemption remaining, and you could have made a wise tax move — at least as long as you stayed under the new threshold. If you gave away more than $6.5 million between 2018 and 2025 — up to the limit during that time — the IRS says you won’t be penalized.

However, if the exemption stays the same after 2026, at nearly $13 million, if you gave away $3.5 million, you’d have essentially $9.5 million left in lifetime exemption. However, be careful not to use up your entire exemption. If you give everything away while living, you won’t have any exemption left. The annual gift-giving limit without losing any of your lifetime exemptions is $17,000 per recipient in 2023.

Reference: Microsoft (Aug. 7, 2023) “If I have $10 million, how much should I give away while I’m alive?”

How Does Estate Planning Work for Caregiving Children?

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.

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

How to Transfer Business to the Next Generation

The reality and finality of death is uncomfortable to think about. However, people need to plan for death, unless they want to leave their families a mess instead of a blessing. In a family-owned business, this is especially vital, according to a recent article, “All in the Family—Transition Strategies for Family Businesses” from Bloomberg Law.

The family business is often the family’s largest financial asset. The business owner typically doesn’t have much liquidity outside of the business itself. Federal estate taxes upon death need special consideration. Every person has an estate, gift, and generation-skipping transfer tax exemption of $12.06 million, although these historically high levels may revert to prior levels in 2026. The amount exceeding the exemption may be taxed at 40%, making planning critical.

Assuming an estate tax liability is created upon the death of the business owner, how will the family pay the tax? If the spouse survives the business owner, they can use the unlimited marital deduction to defer federal estate tax liabilities, until the survivor dies. If no advance planning has been done prior to the death of the first spouse to die, it would be wise to address it while the surviving spouse is still living.

Certain provisions in the tax code may mitigate or prevent the need to sell the business to raise funds to pay the estate tax. One law allows the executor to pay part or all of the estate tax due over 15 years (Section 6166), provided certain conditions are met. This may be appropriate. However, it is a weighty burden for an extended period of time. Planning in advance would be better.

Business owners with a charitable inclination could use charitable trusts or entities as part of a tax-efficient business transition plan. This includes the Charitable Remainder Trust, or CRT. If the business owner transfers equity interest in the business to a CRT before a liquidity event, no capital gains would be generated on the sale of the business, since the CRT is generally exempt from federal income tax. Income from the sale would be deferred and recognized, since the CRT made distributions to the business owner according to the terms of the trust.

At the end of the term, the CRT’s remaining assets would pass to the selected charitable remainderman, which might be a family-established and managed private foundation.

Family businesses usually appreciate over time, so owners need to plan to shift equity out of the taxable estate. One option is to use a combination of gifting and selling business interests to an intentionally defective grantor trust. Any appreciation after the date of transfer may be excluded from the taxable estate upon death for purposes of determining federal estate tax liabilities.

For some business owners, establishing their business as a family limited partnership or limited liability company makes the most sense. Over time, they may sell or gift part of the interest to the next generation, subject to the discounts available for a transfer. An appraiser will need to be hired to issue a valuation report on the transferred interests in order to claim any possible discounts after recapitalizing the ownership interest.

The ultimate disposition of the family business is one of the biggest decisions a business owner must make, and there’s only one chance to get it right. Consult with an experienced estate planning attorney and don’t procrastinate. Succession planning takes time, so the sooner the process begins, the better.

Reference: Bloomberg Law (Nov. 9, 2022) “All in the Family—Transition Strategies for Family Businesses”

Can You Prevent Family Fights over Inheritance?

Inheritance battles can create new conflicts, inflame long-standing resentments and squander assets intended to make heir’s lives better. What can families do to prevent estate battles when a loved one’s intentions aren’t accepted is the question asked by the recent article, “Warning Signs Of Estate Disputes—And Ways to Avoid Them,” from mondaq.com.

Here are the more common scenarios leading to family estate battles:

  • Siblings who are always fighting over something
  • Second or third marriages
  • Disparate treatment of children, whether real or perceived
  • Mental illness or additional issues
  • Isolation or estrangement
  • Economic hardship

There are steps to take to minimize, if not eliminate the likelihood of estate battles. The most important is to have an estate plan in place, including all the necessary documents to clearly indicate your wishes. You may want to include a letter of intent, which is not a legally enforceable document. However, it can support the wishes expressed in estate planning documents.

Update the Estate Plan. Does your estate plan still achieve the desired outcome? This is especially important if the family has experienced big changes to finances or relationships. An estate plan from ten years ago may not reflect current circumstances.

Make Distributions Now. For some families, giving with “warm hands” is a gratifying experience and can remove wealth from the estate to avoid battles as everything’s already been given away. The pleasure of seeing families enjoy the fruits of your labor is not to be underestimated, like a granddaughter who is able to buy a home of her own or an entrepreneurial loved one getting help in a business venture.

Appoint a Non-Family Member as a Trustee. Warring factions within a family are not likely to resolve things on their own, especially when cash is at stake. Appointing a family member as a trustee could cause them to become a lightning rod for all of the family’s tensions. Without the confidence of beneficiaries, accusations of self-dealing or an innocent mistake could lead to litigation. Removing the emotions by having a non-family member serve as a professional trustee can lessen suspicion and decrease the chances of legal disputes.

Communicate, with a facilitator, if necessary. Families with a history of disputes often do better when a professional is involved. Depending on the severity of the dynamics, this could range from annual meetings with an estate planning attorney to explain how the estate plan works and have discussions about the parent’s wishes to monthly meetings with a family counselor.

A No-Contest Clause. For some families, a no-contest clause in the will can head off any issues from the start. If people are especially litigious, however, this may not be enough to stop them from pursuing a case. An experienced estate planning attorney will be able to recommend the use of this provision, based on knowing the family and how much wealth is involved.

Addressing the problem now. The biggest mistake is to sweep the issue under the proverbial rug and “let them fight over it when I’m gone.” A better legacy is to address the problem of the family squabbles and know you’ve done the right thing.

As we head into the holiday season, efforts to bring families together and prepare for the future will allow parents, children and grandchildren to enjoy their time together.

Reference: mondaq.com (Nov. 4, 2022) “Warning Signs Of Estate Disputes—And Ways to Avoid Them”

Does Power of Attorney Perform the Same Way in Every State?

A power of attorney is an estate planning legal document signed by a person, referred to as the “principal,” who grants all or part of their decision-making power to another person, who is known as the “agent.” Power of attorney laws vary by state, making it crucial to work with an estate planning attorney who is experienced in the law of the principal’s state of residence. The recent article from limaohio.com, titled “When ‘anything and everything’ does not mean anything and everything,” explains what this means for agents attempting to act on behalf of principals.

When a global or comprehensive power of attorney grants an agent the ability to do everything and anything, it may seem to the layperson they may do whatever they need to do. However, each state has laws defining an agent’s role and responsibilities.

As a matter of state law, a power of attorney does not include everything.

In some states, unless certain powers are explicitly stated, the POA does not include the right to do the following:

  • Create, amend, revoke, or terminate a trust
  • Make a gift
  • Change a beneficiary designation on an account
  • Change a beneficiary designation on a life insurance policy.

If you want your agent to be able to do any of these things, consult with an experienced estate planning attorney, who will know what your state’s law allows.

You’ll also want to keep in mind any gifting empowered by the POA. If you want your agent to gift your property to other people or to the agent, the power to gift is limited to $16,000 of value to any person in one year, unless the POA explicitly states the power to gift may exceed $16,000. An estate planning attorney will know what your state’s limits are and the tax implications of any gifts in excess of $16,000.

These types of limitations are intended to give some common-sense parameters to the POA.

Most people don’t know this, but the power of attorney can be as narrow or as broad as the principal wishes. You may want your brother-in-law to manage the sale of your home but aren’t sure he’ll do a good job with your fine art collection. Your estate planning attorney can create a power of attorney excluding him from taking any role with the art collection and empowering him to handle everything else.

Reference: limaohio.com (April 30, 2022) “When ‘anything and everything’ does not mean anything and everything”

How to Prepare for Higher Taxes

Taxing the appreciation of property on gifting or at death as capital gains or ordinary income is under scrutiny as a means of raising significant revenue for the federal government. The Biden administration has proposed this but proposing and passing into law are two very different things, observes Financial Advisor in the article “How Rich Clients Should Prepare For A Biden Estate Tax Regime.”

The tax hikes are being considered as a means of paying for the American Jobs Act and the American Families Act. Paired with the COVID-19 relief bill, the government will need a total of $6.4 trillion over the course of a decade to cover those costs. Reportedly, both Republicans and Democrats are pushing back on this proposal.

A step-up in basis recalculates the value of appreciated assets for tax purposes when they are inherited, which is when the asset’s value usually is higher than when it was originally purchased. For the beneficiary, the step-up in basis at the death of the original owner reduces the capital gains tax on the asset. Taxes are reduced significantly, or in some cases, completely eliminated.

For now, taxpayers pay an estate tax on the value of the assets and the basis of appreciated assets is stepped up to fair market value. The plan under consideration would treat appreciated assets owned at the time of death as sold, which would trigger income tax and subject those assets to estate tax.

Biden’s proposal would also subject many families to the estate tax, which they would not otherwise face, since the federal estate tax exclusion is still historically high—$11.7 million for individuals and $23.4 million for married couples. Let’s say a widowed mother dies with a $3 million estate. Most of the value of the estate is the home she lived in with her spouse for the last four decades. Her estate would not owe any federal tax, but the deemed sale of a highly appreciated home would generate income tax liability.

The proposal allows a $1 million per individual and $2 million per married couple exclusion from gain recognition on property transferred by gift or owned at death. The $1 million per person exclusion is in addition to exclusions for property transfers of tangible personal property, transfers to a spouse, transfers to charity, capital gains on certain business stock and the current exclusion of $250,000 for capital gain on a personal residence.

How should people prepare for what sounds like an unsettling proposal but may end up at a completely different place?

For some, the right move is transferring properties now, if it makes sense with their overall estate plan. Regardless of what Congress does with this proposal, the estate tax exemption will sunset to just north of $5 million (due to inflation adjustments) from the current $11.7 million. However, the likelihood of the proposal passing in its present state is low. The best option may be to make any revisions focused on the change to the estate tax exemption levels.

Reference: Financial Advisor (June 28, 2021) “How Rich Clients Should Prepare For A Biden Estate Tax Regime”

How Do You Divide Inheritance among Children?

A father who owns a home and has a healthy $300,000 IRA has two adult children. The youngest, who is disabled, takes care of his father and needs money to live on. The second son is successful and has five children. The younger son has no pension plan and no IRA. The father wants help deciding how to distribute 300 shares of Microsoft, worth about $72,000. The question from a recent article in nj.com is “What’s the best way to split my estate for my kids?” The answer is more complicated than simply how to transfer the stock.

Before the father makes any kind of gift or bequest to his son, he needs to consider whether the son will be eligible for governmental assistance based on his disability and assets. If so, or if the son is already receiving government benefits, any kind of gift or inheritance could make him ineligible. A Third-Party Special Needs Trust may be the best way to maintain the son’s eligibility, while allowing assets to be given to him.

Inherited assets and gifts—but not an IRA or annuities—receive a step-up in basis. The gain on the stock from the time it was purchased and the value at the time of the father’s death will not be taxed. If, however, the stock is gifted to a grandchild, the grandchild will take the grandfather’s basis and upon the sale of the stock, they’ll have to pay the tax on the difference between the sales price and the original price.

You should also consider the impact on Medicaid. If funds are gifted to the son, Medicaid will have a gift-year lookback period and the gifting could make the father ineligible for Medicaid coverage for five years.

An IRA must be initially funded with cash. Once funded, stocks held in one IRA may be transferred to another IRA owned by the same person, and upon death they can go to an inherited IRA for a beneficiary. However, in this case, if the son doesn’t have any earned income and doesn’t have an IRA, the stock can’t be moved into an IRA.

Gifting may be an option. A person may give up to $15,000 per year, per person, without having to file a gift tax return with the IRS. Larger amounts may also be given but a gift tax return must be filed. Each taxpayer has a $11.7 million total over the course of their lifetime to gift with no tax or to leave at death. (Either way, it is a total of $11.7 million, whether given with warm hands or left at death.) When you reach that point, which most don’t, then you’ll need to pay gift taxes.

Medical expenses and educational expenses may be paid for another person, as long as they are paid directly to the educational institution or health care provider. This is not considered a taxable gift.

This person would benefit from sitting down with an estate planning attorney and exploring how to best prepare for his youngest son’s future after the father passes, rather than worrying about the Microsoft stock. There are bigger issues to deal with here.

Reference: nj.com (June 24, 2021) “What’s the best way to split my estate for my kids?”

Should You Gift Stocks as Part of Your Estate Plan?

There are a number of ways to gift stock to family members, during your lifetime or after you die, according to a recent article from Think Advisor titled “Gifting Stock to Family Members: What You Need to Know.” The idea is simple, but how the gifting is done and what taxes may or may not need to be paid (and by whom) requires a closer look.

A gift of stock today is made through an electronic transfer from your account to the investment account of the recipient of the shares. The rules for gifting shares of stocks also apply to gifting ETFs and mutual funds.

Lifetime gifts. Stock gifts can be made in place of giving cash. The annual gift limit of $15,000 per person or $30,000 for a joint gift with your spouse, applies, and the value of the stock on the day of the transfer constitutes the amount of the gift.

If you gift in excess of the annual gifting limits, this takes a bite out of your lifetime gift and tax exemption, which as of this writing is $11.7 million per person for federal estate taxes. That’s something to keep in mind when deciding on your gifting strategy.

Using a trust for gifting. Instead of giving cash to a family member, you could use a trust and transfer your shares into the trust, with the family member as a beneficiary of the trust. The treatment of tax and cost basis issues will depend upon the type of trust used. Your estate planning attorney will be able to help you determine what type of trust to use.

Transfer on death. You can also gift stocks to others through your will, through a transfer on death designation in a brokerage account, through a beneficiary designation in a trust if the securities are held there, or through an inherited IRA. Taxes and cost basis will vary, depending upon your circumstances.

Taxes and gifting stock. There are no taxes and no tax implications at the time stocks are gifted to someone, but there are some issues to know before making the gift.

When stocks are given to a relative, there is no tax impact for the donor or the person receiving the stock, and as long as the value of the stock is within the annual gifting limits, the donor does not have to do anything. If the gift value exceeds the limit, the person has to file a gift tax return.

The recipient of the stock shares doesn’t owe capital gains taxes, until the stocks are sold. At that time, the cost basis and holding period of the person who gifted the shares will need to be known in order to determine the tax liability.

If the stock is gifted at a price below the donor’s cost basis and sold at a loss, the recipient’s cost basis and holding period is determined by the fair market value of the stock on the date of the gift. However, if the price of the shares increases above the donor’s original cost basis, their cost basis and holding period need to be known to calculate the recipient’s capital gain.

Gifting to children or grandchildren. Gifting shares of appreciated stock to children and grandchildren can make sense for the donors, since they are taking the value of the stock out of their estate and gifting it to a child or grandchild in a lower tax bracket. The recipient or their parents could sell the shares and pay a lower capital gains rate, or even no capital gains taxes. However, if the recipient is a current or future college student, or the student’s parent, the gift could reduce eligibility for need-based financial aid. The stock may need to be reported as an asset belonging to the student or the parent, increasing their income when they are received and/or when they are sold.

Speak with your estate planning attorney before gifting stock or cash to family members. There will be sensible ways to be generous without creating any issues for recipients.

Reference: Think Advisor (Jan. 25, 2021) “Gifting Stock to Family Members: What You Need to Know”

estate plan goals

Gifting Can Help Estate Plans and Heirs Reach Goals

The applicable exclusion amount for gift/estate tax purposes is $11.58 million in 2020, a level that makes incorporating gifting into estate plans very attractive for high net-worth families. If a donor’s taxable gift—one that does not qualify for the annual, medical or education exclusion—is in excess of this amount, or if the value of the donor’s aggregate taxable gifts is higher than this amount, the federal gift tax will be due by April 15 of the following year. The current gift tax rate is 40%.

This presents an opportunity, as described in detail in the article “The Case for Gifting Now (or At Least Planning for the Possibility” from The National Law Review.

If the exclusion is used during one’s lifetime, it reduces the amount of the exemption available at death to shelter property from the estate tax. With proper planning, spouses may currently gift or die with assets totally as much as $23.16 million, with no gift or federal estate tax.

To gain perspective on how high this exclusion is, in 2000-2001, the applicable exclusion amount was $675,000.

The exclusion amount will automatically decrease to approximately $6.5 million on January 1, 2026, unless changes are made by Congress before that time to continue the current exclusion amount. Now is a good time to have a conversation with your estate planning attorney about making gifts in advance of the scheduled decrease and/or any changes that may occur in the future. The following are reasons why this exemption may be lowered:

  • Trillions of dollars in federal stimulus spending necessitated by the COVID-19 pandemic and the severe economic downturn in the U.S.
  • Past precedent of passing tax legislation mid-year and applying it retroactively to January 1.
  • A possible change in party control for the presidency and/or the Senate
  • The use of the budget reconciliation process to pass changes to taxes.

In the 100-plus year history of the estate tax, the exemption has never gone down. However, the exemption has also never been this high. The possibility of a compressed timeframe for family business owners and wealthy individuals to implement lifetime gifts before any legislative change may make a tidal wave of gifting transactions challenging between now and December 31, 2020. Now is the time to start planning and take action to utilize the exclusion amount.

Reference: The National Review (Aug. 20, 2020) “The Case for Gifting Now (or At Least Planning for the Possibility”

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