2019-2020 Estate Planning; It’s not too Late!

Estate Planning Blocks

Thanksgiving is just weeks away and 2020 is not far behind – weren’t we just thinking about Y2K –  so as 2019 winds down consider taking steps to help reduce your estate tax exposure (and might also entice the children to show up for the holidays).

Think about more than just holiday gifts –

The 2019 exemption from the federal gift, estate, and generation-skipping transfer tax is $11,400,000 ($22.8 million for a married couple) and will increase in 2020 to $11,580,000.

The annual gift tax exclusion is $15,000 so that an individual can gift $15,000 without using her exemption.  A married couple can give $30,000 per person regardless of which spouse actually makes the gift.  (Tuition payments made directly to the school and medical expenses paid directly to the provider can be made in addition to annual exclusion gifts and do not reduce in any amount the gift tax exemption.)

Why make a gift:

  • A gift will shift future appreciation and income out of the donor’s taxable estate.
  • Paying gift tax (in the case of a taxable gift) is tax-efficient as the gift tax is only imposed on the property that is given away, whereas the estate tax is imposed on all of the property in the estate. The effect is that if the donor survives at least three years after the gift, the amount of the gift tax will not be subject to estate tax. For example, if in 2019 Fred, a widower who has already used his lifetime exemption, gives $1.5 million to his daughter Frieda, the gift tax would be $600,000.  If Fred survives three years, the $600,000 paid in gift tax is not part of his estate for estate tax purposes. The tax savings of making the gift is 40% of the gift tax, or about $240,000.
  • Many states, including New York, New Jersey, Georgia, Florida, and California do not have a gift tax. Lifetime gifts in these states can reduce state estate taxes.  Note however that in NY a gift made within 3 years of death (other than annual exclusion gifts and tuition and medical payments) will be added back to the decedent’s taxable estate, resulting in the payment of NYS estate tax on the gift.[1]

Speaking of estate taxes

By your Will, you can direct the allocation of the payment of estate taxes.  For example, if you have a taxable estate and you leave your IRA to your grandchildren and the rest of your estate to your children, who is to pay the estate taxes on the IRA?  You can control the outcome.  Is it your intention that the grandchildren receive the IRA intact, without reduction for estate taxes?  While the taxes are the same either way, the ultimate economic effect on the beneficiaries will obviously be impacted.  If you say nothing or die without a Will, the estate taxes will be apportioned among the beneficiaries.

Now that you mentioned IRAs –

Are you required to receive the required minimum distribution (RMD) from your IRA?  Do you make charitable contributions?  Upset at the loss of your itemized deductions?  If you use your RMD for a donation that is paid to the charity directly from the IRA, you will not need to report that amount in income.  You are essentially getting a dollar-for-dollar income tax charitable deduction.  Some caveats:  contributions are limited to $100,000 annually, the contribution must be made to a public charity and not a private foundation or donor-advised fund, the entire contribution must be for charitable purposes, e.g., you can’t use it to pay for a table at the charity’s gala, and you must get proper substantiation from the charity.

Interest Rates

The annual short-term, mid-term and long-term interest rates as set by the Treasury for November 2019[2] are 1.68%, 1.59%, and 1.94%, respectively.  These are the minimum rates set by the Treasury that must be charged on transactions to avoid the imputation of interest.

The November 2019 Section 7520 rate is 2.0%. This rate is used to calculate the value of certain transfers such as a grantor retained annuity trust (GRAT), charitable lead trust, or charitable remainder trust. Growth beyond this “hurdle” rate generally accrues to the donee.

The current low-interest rate environment provides attractive estate planning opportunities with respect to GRATs, charitable lead annuity trusts, installment sales, and intra-family loans.

[1] New York does have an estate tax.  The 2019 exemption is $5,740,000 and the exemption will adjust for inflation on January 1st.

[2] The interest rates are set monthly.

If you have any questions or want to be proactive and do something before the end of the year, please contact your New York Private Client Counsel.