Reasonable ways to minimize estate taxes?

[SecondCor521]

You are qualified!

Can you dumb it down for me. If I am married and know today my estate (NW) is over the 2026 $11M threshold, but not over the combined $22M+ limit today, can I not wait until I know for sure what the estate tax law will be, and prior to that date, set up the appropriate trusts to avoid the estate tax? Or, are there specific strategies prior to 2026 I really should take now (i.e. gifting now, Roth conversions)? Are there certain assets that fall outside of/not counted toward the estate value as it relates to the estate tax?

I'm not the person you asked, but you may be interested to investigate the DSUEA - Deceased Spouse Unused Exemption Amount.

The problem I see in general is that you don't know for sure what the estate tax law will be until you die, and the government tends to change the rules frequently enough and by large enough amounts where if they changed things adversely it could mess up any plans.

More aggressive gifting? Someone with a $10M estate taking it down to $1M in 4 years? How old is this person? What are they supposed to live on? What about their long term care needs? Honestly, I can’t see someone gifting away 90% of their net worth in such a short period unless the remainder was still substantial.

It was a hypothetical intended to illustrate a point. But in the actual case I'm thinking about, the person is old enough and wealthy enough to where the estate tax is an issue to be considered. I had thought about the "what to live on" question, and my thoughts there were (a) only give enough away such that the remainder was enough to live on, and (b) the recipients of the gift would be trustworthy enough and have enough respect to help pay for any long term care needs of the person. (B) might not be workable for any number of reasons.

I'm still trying to analyze the landscape myself.

 

[imnontrad]

Another thing to consider is setting up a "Crummey Trust" for your children/grandchildren. You make a contribution up to the gift limit. The recipient has a specific amount of time to withdraw that money and if they do not, then it is subject to the distribution rules of the trust (and if they DO withdraw, the recipient knows that you will not be contributing again!).

When my mother set up this for the grandkids, the distribution she set up was 1/3 at 25, 1/2 at 30 and the rest at 35 with the additional note that it could be used for college expenses. However one downside is that this trust (even if there are no distributions until later in life) is counted as an asset in FAFSA applications.

https://www.investopedia.com/terms/c/crummey-trust.asp

 

[cathy63]

... She is a California resident - California's estate tax mirrors the Federal ~$11M initial tax amount. Current estate is less that $11M and way more than $1M...

California currently has no estate or inheritance taxes, even for estates over the Federal min of $11.58M. There was an attempt in the CA legislature last year to pass a new estate tax, but the bill died, and even if it had passed it would have had to be approved by the voters before it could go into effect.

 

[audreyh1]

It was a hypothetical intended to illustrate a point. But in the actual case I'm thinking about, the person is old enough and wealthy enough to where the estate tax is an issue to be considered. I had thought about the "what to live on" question, and my thoughts there were (a) only give enough away such that the remainder was enough to live on, and (b) the recipients of the gift would be trustworthy enough and have enough respect to help pay for any long term care needs of the person. (B) might not be workable for any number of reasons.

I'm still trying to analyze the landscape myself.

Well the point it illustrates to me is make darn sure you have plenty more than enough for yourself and spouse before gifting it all away while alive. So what if the remaining estate is subject to tax? Judicious gifting is a great idea (and something we ourselves have been aggressive with) but we’re not going to let estate taxes overwhelm other considerations. We’ll be careful to preserve pass through unused exemptions, etc.

We absolutely won’t gift the bulk of our net worth expecting recipients to help us out if we end up overdoing it. Talk about sacrificing financial independence!

 

[Dash man]

This is how I understand a reduction in the threshold for the estate tax works if you gift or plan to gift to avoid the tax. Right now it is ~$11M/pp or $22M/ couple. Let's say a couple is worth $20M now and gifts $15M of their estate.
If they both died this year, no estate tax is owed.
If one died this year and the spouse took the late spouse's estate tax exemption, then died next year with an estate value of $6M (a $1M increase in value from the original $5M, no estate tax is owed.
If the spouse lived until 2026 and the remaining estate was valued at $8M, and the estate tax threshold reduced to $6M/pp or $12M/couple, her estate would have to pay tax on the entire $8M of her remaining estate because the original gifts of $15M are greater than the current lifetime exemption allowed. However there would be no effect on the original $15M gift under the previous $22M/per couple rule.

 

[MarieIG]

Thanks it makes me wonder if the amount is above x do they try to grab it then?

Probate varies significantly from State to State.

 

[cathy63]

I don't think your last example is quite right. Based on the IRS' announcement of the "no clawback" rules, here's how I think it would work.

This is how I understand a reduction in the threshold for the estate tax works if you gift or plan to gift to avoid the tax. Right now it is ~$11M/pp or $22M/ couple. Let's say a couple is worth $20M now and gifts $15M of their estate.

When it comes to calculating gift and estate tax, giving is an individual act, so let's reword the conditions to say each member of the couple gives away $7.5M while they are alive and while the exemption is $11.5M and they checked the box on form 709 to indicate that.

If they both died this year, no estate tax is owed. Agree

If one died this year and the spouse took the late spouse's estate tax exemption, then died next year with an estate value of $6M (a $1M increase in value from the original $5M, no estate tax is owed.

Agree. In this case, the first decedent's estate uses $7.5M of the $11.5M exemption to cover the gifts, leaving $4M that can be ported to the surviving spouse. The second estate now has a total exemption of $15.5M, $7.5M of which covers her gifts. The remaining $8M of the exemption will cover the $6M estate.

If the spouse lived until 2026 and the remaining estate was valued at $8M, and the estate tax threshold reduced to $6M/pp or $12M/couple, her estate would have to pay tax on the entire $8M of her remaining estate because the original gifts of $15M are greater than the current lifetime exemption allowed. However there would be no effect on the original $15M gift under the previous $22M/per couple rule.

This is where I disagree. As in the previous example, the first decedent's estate uses $7.5M of the $11.5M exemption to cover gifts, leaving $4M that can be ported to the surviving spouse. Per the IRS, that $4M won't be clawed back. The second spouse dies in 2026, when the exemption is $6M so that estate has a total exemption of $10M. $7.5M will cover the previous gifts and the remainder of $2.5M is applied against the $8M estate, leaving "only" $5.5M subject to tax.

 

[Dash man]

That's not how I understand it. The IRS will not claw back on gifts made for the exemption in effect at the time the gifts were made. But I can't find where you claim the higher portability stays in effect.
https://www.irs.gov/newsroom/estate-and-gift-tax-faqs

Q. How did the IRS clarify the law?

A. To address concerns expressed by a number of stakeholders, the proposed regulations clarify that people taking advantage of the increased BEA by making gifts during the period 2018 to 2025 will not be harmed after 2025 when this amount is scheduled to drop. The regulations provide a special rule that effectively allows the estate to compute its estate tax credit using the greater of the BEA applicable to gifts made during life, or the BEA applicable on the date of death. As a result, people planning to make large gifts between 2018 and 2025 can do so without being concerned that they will lose the tax benefit of the higher exclusion level once it decreases.

Q. How does the special rule work?

A. Here’s an example. Before 2018, A had never made a taxable gift. In 2018 when the BEA is $11.18 million, A makes a taxable gift of $9 million. A uses $9 million of the available BEA to reduce the gift tax to zero. A dies in 2026. Even if the BEA is lower that year, A’s estate can still base its estate tax calculation on the higher $9 million of BEA that was used in 2018.

 

[SecondCor521]

That's not how I understand it. The IRS will not claw back on gifts made for the exemption in effect at the time the gifts were made. But I can't find where you claim the higher portability stays in effect.

The DSUEA occurs at the time of death and is basically whatever portion of the BEA that the first-to-die spouse doesn't use. (*) My understanding is that the surviving spouse gets to add that amount, whatever it is, to their BEA when they die.

I assume the reason the IRS hasn't clarified that point is either (a) nobody has thought to ask them yet, and/or (b) the DSUEA rule is the same regardless of changes to the BEA, so there's no need to clarify anything because everyone can follow the same basic rule no matter what their BEA situation plus gifting history turns out to be.

(*) Of course, someone responsible has to file a Form 706 in timely fashion and check a box somewhere on there, and probably do the calculations to figure out what the DSUEA actually is.

 

[Dash man]

The DSUEA occurs at the time of death and is basically whatever portion of the BEA that the first-to-die spouse doesn't use. (*) My understanding is that the surviving spouse gets to add that amount, whatever it is, to their BEA when they die.



I assume the reason the IRS hasn't clarified that point is either (a) nobody has thought to ask them yet, and/or (b) the DSUEA rule is the same regardless of changes to the BEA, so there's no need to clarify anything because everyone can follow the same basic rule no matter what their BEA situation plus gifting history turns out to be.



(*) Of course, someone responsible has to file a Form 706 in timely fashion and check a box somewhere on there, and probably do the calculations to figure out what the DSUEA actually is.

Something to ask my attorney to clarify next time we meet, though it will be a while. But as I understand from our last meeting, the DSUEA will not carry over the higher numbers. Either way, let’s hope we don’t have to worry about it in the near term. I’d rather my wife and I have many more years together! Good night!

 

[luckydude]

Well the point it illustrates to me is make darn sure you have plenty more than enough for yourself and spouse before gifting it all away while alive. So what if the remaining estate is subject to tax? Judicious gifting is a great idea (and something we ourselves have been aggressive with) but we’re not going to let estate taxes overwhelm other considerations. We’ll be careful to preserve pass through unused exemptions, etc.

We absolutely won’t gift the bulk of our net worth expecting recipients to help us out if we end up overdoing it. Talk about sacrificing financial independence!

+1 million.

I personally know a couple of instances of parents giving most of their estate away to their adult children so they could reduce their income/NW and take advantage of government aids/programs for low-income seniors. They trusted their adult children to take care of them in exchange when they decided to give their money to them, but these adult children ignored/abandoned them once they got their hands on their parents' money.

I love my 2 kids and trust that they would not do something like that to me and DW in similar circumstance, but I also know that human nature is unpredictable, and I would never put us in that position to depend on them. In short, we trust our kids, but we don't want to have to test that trust just so we can save $ on estate taxes.

FWIW, DW and I are a stone's throw away from the current estate tax exemption amount for a couple.

Lucky Dude

 

[cathy63]

That's not how I understand it. The IRS will not claw back on gifts made for the exemption in effect at the time the gifts were made. But I can't find where you claim the higher portability stays in effect.
https://www.irs.gov/newsroom/estate-and-gift-tax-faqs

Q. How did the IRS clarify the law?

A. To address concerns expressed by a number of stakeholders, the proposed regulations clarify that people taking advantage of the increased BEA by making gifts during the period 2018 to 2025 will not be harmed after 2025 when this amount is scheduled to drop. The regulations provide a special rule that effectively allows the estate to compute its estate tax credit using the greater of the BEA applicable to gifts made during life, or the BEA applicable on the date of death. As a result, people planning to make large gifts between 2018 and 2025 can do so without being concerned that they will lose the tax benefit of the higher exclusion level once it decreases.

Q. How does the special rule work?

A. Here’s an example. Before 2018, A had never made a taxable gift. In 2018 when the BEA is $11.18 million, A makes a taxable gift of $9 million. A uses $9 million of the available BEA to reduce the gift tax to zero. A dies in 2026. Even if the BEA is lower that year, A’s estate can still base its estate tax calculation on the higher $9 million of BEA that was used in 2018.

See https://www.federalregister.gov/d/2019-25601/p-66. Your doc above is talking about the proposed regulations, but this one addresses the comments and questions that they got after making the proposal and talks about how they addressed them. The DSUE issue one thing that they clarified.

(2). A decrease in the BEA after 2025 will reduce the surviving spouse's AEA only to the extent that it is based upon the BEA, but not to the extent that it is based on the DSUE amount. Therefore, the sunset of (or any other decrease in) the increased BEA has no impact on the existing DSUE rules and the existing regulations governing DSUE continue to apply. Examples 3 and 4 of § 20.2010-1(c)(2)(iii) and (iv), respectively, of these final regulations address this situation.

(iii) Example 3. Individual B's predeceased spouse, C, died before 2026, at a time when the basic exclusion amount was $11.4 million. C had made no taxable gifts and had no taxable estate. C's executor elected, pursuant to § 20.2010-2, to allow B to take into account C's $11.4 million DSUE amount. B made no taxable gifts and did not remarry. The basic exclusion amount on B's date of death is $6.8 million. Because the total of the amounts allowable as a credit in computing the gift tax payable on B's post-1976 gifts attributable to the basic exclusion amount (zero) is less than the credit based on the basic exclusion amount allowable on B's date of death, this paragraph (c) does not apply. The credit to be applied for purposes of computing B's estate tax is based on B's $18.2 million applicable exclusion amount, consisting of the $6.8 million basic exclusion amount on B's date of death plus the $11.4 million DSUE amount, subject to the limitation of section 2010(d).

 

[Dash man]

See https://www.federalregister.gov/d/2019-25601/p-66. Your doc above is talking about the proposed regulations, but this one addresses the comments and questions that they got after making the proposal and talks about how they addressed them. The DSUE issue one thing that they clarified.

I stand corrected. But it took me a few cups of coffee and a shower before I could sort of grasp what it was saying.

 

[Sunset]

Another perspective is I inherited $70K when my last parent died.

So if I died with a number at the exemption limit in the future, as long as it was at least $1 million, my kids would still inherit a lot more even if it was only 75% of my estate.

I have seen the work ethic and work motivation destroyed in a relative and in a friend who were routinely gifted substantial amounts.

 

[RenoJay]

The thing I keep in mind is that politicians themselves are rich, on both sides of the aisle, and self-interest runs strong with that group.
Yes, I believe there will be changes to estate tax law but I suspect they won’t be as drastic as most of the headline numbers would have us worry about. That said, gifting, charitable giving and hosting elaborate Brewster’s Millions style parties are good ways to reduce a taxable estate.

 

[gerntz]

- We're splitting up tIRA's beneficiaries between more people now - grandkids as well as kid - so that the 10 years distribution time limit is taxed at lower rates.
- We're also not the beneficiary* of each other's tIRA now so that the distribution time is longer than 10 years of taxing assuming we die at least one year apart. * Since my tIRA is larger, part goes to DW to even up the amounts in each 10 years period assuming I die first.

 

[rkser]

Thanks for a informative thread, I am following

 

[ERD50]

- We're splitting up tIRA's beneficiaries between more people now - grandkids as well as kid - so that the 10 years distribution time limit is taxed at lower rates.
- We're also not the beneficiary* of each other's tIRA now so that the distribution time is longer than 10 years of taxing assuming we die at least one year apart. * Since my tIRA is larger, part goes to DW to even up the amounts in each 10 years period assuming I die first.

Does it work that way? The sources I see show that spouses have the same rules as old, which means they can do RMDs same as their own, over their lifetime.

https://obliviousinvestor.com/inherited-ira-rules/

Death in 2020 or Later

If the IRA owner dies in 2020 or later, we first have to determine whether the beneficiary is an “eligible beneficiary.”

Eligible beneficiaries include:

the surviving spouse of the original account owner,
a minor child of the original account owner,
anybody who is disabled or chronically-ill (per the definition found in IRC 7702B(c)(2)), or
any designated beneficiary who is not more than 10 years younger than the original account owner.

If the beneficiary is an eligible beneficiary, then the old rules apply (see below).

 

[audreyh1]

Yeah - if beneficiary is a surviving spouse, or not more than 10 years younger than the original account owner, you retain the old rules.