9 Estate Planning Tax TipsSubmitted by MIRUS Financial Partners on September 20th, 2019
While it’s always smart to review your estate planning strategy on regularly, it’s especially important to when there are major changes in the tax laws, as there was in 2019. This is a great time to think about your changing circumstances and revisit your goals to determine if your current trust and estate strategies are still valid. With this mind, here’s a list of some of the tax issues to consider.
1. Inheriting an IRA
When an IRA is inherited, the distribution requirements vary for spouses and non-spouse beneficiaries. Spousal beneficiaries can roll funds into an inherited IRA or into his or her own IRA and can wait to begin taking required minimum distributions (RMDs) until reaching age 70 ½.
A non-spousal beneficiary must either withdraw all funds within five years or based upon his or her life expectancy (and can’t wait until age 70 ½). RMDs will depend on whether the original owner died before or after his or her required beginning date.
2. Inheriting Qualified Plan Funds
While inherited IRAs can usually be distributed over time, qualified plans (such as 401(k)s) can’t be distributed over the beneficiary’s life expectancy. Instead, the funds must be distributed immediately as one lump sum payment, which presents an immediate tax liability for the beneficiary. However, designated beneficiaries of qualified plans may roll those funds into an inherited IRA, which can result in tax savings.
3. Temporarily Increased Estate Tax Exemption
Tax reform legislation in 2017 increased the transfer tax exemption to $11.4 million per individual, or $22.8 million per married couple, as adjusted for inflation in 2019. The transfer tax exemption applies to transfers at death and transfers made during life from the estate, gift and generation-skipping transfer (GST) taxes. These changes offer opportunities for protecting greater portions of inherited wealth from eventual taxation.
The $11.4 million per individual transfer tax exemption (as adjusted for inflation in 2019) is only temporary. After 2025, it will revert back to the pre-reform levels of around $6 million per individual, factoring in anticipated inflation adjustments. While there are short-term benefits, it is not wise to depend on these tax codes to apply beyond 2025.
4. IRS Confirms: No Clawback for Post-Reform Transfer Tax Exemption
The IRS has confirmed that clients will be allowed to make large gifts from 2018-2025 (when the expanded $11.4 million-per person transfer tax exemption is in place) without fear of any kind of “clawback” if the client dies in a later year, when the exemption is lower.
This means that clients can take steps to use up the entire $22.8 million per-married-couple transfer tax exemption between 2019 and 2025 without any fear that they will be subject to a transfer tax liability for those gifts in later years.
5. Formula Trusts Should Be Reevaluated Post-Reform
For people using "formula trusts" in their estate planning, changes can be made to take advantage of the full transfer tax exemption, which changes each year. In formula plans, assets up to the exemption amount will be placed into a credit shelter trust, with the remainder placed into a marital trust designed to take advantage of the marital deduction. However, with the enlarged estate tax exemption, you may find that no assets will remain to be transferred to the marital trust. This will be an issue if the surviving spouse is not also the beneficiary of the credit shelter trust.
6. Portability is Still Possible
Portability allows the surviving spouse to take advantage of individual federal estate tax exemptions as well as the exemptions granted to a first-to-die spouse. The portability rules remain intact post-reform. However, this can cause a problem for surviving spouses when the entire estate of the first-to-die spouse is sheltered from estate tax. However, portability is not automatic. Remember that the executor of the estate must elect portability by filing an estate tax return on Form 706 within nine months of the death, although an extension (requested by filing Form 4768) may be available if the executor can show good cause.
7. SLAT Trusts
A spousal lifetime access trust (SLAT) might allow beneficiaries to take advantage of the full transfer tax exemption before it expires after 2025. This irrevocable trust could allow you to remove assets from your estate and still maintain access to those assets during your lifetime. SLATs are funded when a married client transfers assets into the irrevocable trust for the benefit of the spouse. The gift to this irrevocable trust removes the assets from the client’s estate but allows the spouse to access the trust assets if necessary (instead of ceding all control to a trustee.) SLATs allow a degree of control over the assets while protecting the assets from creditors.
8. ING Trusts: Complete vs. Incomplete Gift Strategy
An ING trust is an intentionally non-grantor trust (or an irrevocable non-grantor trust) that is designed for tax savings during your lifetime but can increase your estate tax exemption. Central to the ING trust strategy is the presence of an “adverse party”—or a group of adverse parties—who control trust distributions to beneficiaries. Gifts to the trust can be either incomplete, (allowing the trust creator to retain a degree of control over the assets and avoid gift taxes) or complete (the transfer creates a deduction from the client’s lifetime transfer tax exemption amount.)
9. State-Level Estate Taxes
While federal-level transfer tax exemptions are now in place, states that impose their own estate taxes have largely decided against matching the federal exemption. For example, Pennsylvania does not have an exemption amount and still imposes an inheritance tax. While PA inheritance tax is 0% if to your surviving spouse, direct decedents and lineal heirs will need to pay 4.5%, siblings will pay 12%, and all others will owe 15%. Hawaii kept its exemption at $5.49 million and Maryland sets its exemption at $5 million for 2019 and beyond. That means that residents of many states will not be able to take advantage of the temporarily increased estate tax exemption. However, estate planning guidance can help higher-income PA state residents find ways to minimize estate taxes using other strategies.
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Investment Advisor Representative offering Securities and Advisory Services through Cetera Advisor Networks LLC, member FINRA/SIPC. Cetera is under separate ownership from any other named entity. MIRUS Financial Partners and Cetera Advisor Networks LLC are not affiliated.