Reasonable ways to minimize estate taxes?

[SecondCor521]

Hi all,

Does anyone have any thoughts on reasonable ways to minimize estate taxes?

The current exemption is about $11.58M, scheduled to drop to ~$6M in 2026, and there is the potential for the law to be changed in various ways to make the estate tax more aggressive (lower exemption amount, higher rate, changes to step-up).

I include the word "reasonable" in my question because I'd like to avoid aggressive or shady things that might be suggested to me by Facebook sponsored posts or the wilds of the Internet. I figure y'all are relatively reasonable folks who may have considered the question or have experience with it.

Assume no spouse. Assume kid/grandkid heirs. Assume ~25% federal marginal tax bracket.

Specific but still general questions:

1. How do you plan around such wide potential changes in the law? Someone with $3M today is probably pretty relaxed unless the exemption drops to $1M, but that change would result in a ~$800K tax bill, which is more than two Chipotle burritos.

2. Does the law in this area change with enough advance notice to where reasonable strategies can be implemented fast enough to make an appreciable difference?

3. If you're facing this question, how are you approaching the issue regarding tradeoffs between (a) income taxes now vs. estate taxes later, (b) retaining enough money to support the person vs. avoiding estate taxes, (c) tax rates of the owner vs. tax rates of the beneficiary, (d) other tradeoffs I may not have thought of.

4. How likely do you think it is that this area of the law will be changed and when and why? (Yeah, yeah, broken crystal balls. I know.)

Please avoid political and moral discussions and stick to strategies.

Thanks.

 

[street]

With no intent to add politics to this subject, it will change in drastic measures depending on power at the time. I see changes coming, it may be good or it may be bad.

I will be using the tax form 709 for a large gift in 2020.

 

[Brat]

Hire a good estate lawyer.

One way is to start gifting to your heirs. Another is to fund 529s for young heirs.

Spend your estate before the tax man cometh.

 

[Stormy Kromer]

Hire a good estate lawyer.

One way is to start gifting to your heirs. Another is to fund 529s for young heirs.

Spend your estate before the tax man cometh.

This is attorney territory.

Give it away on this side of the grass.

 

[foxfirev5]

Give it away on this side of the grass.

I believe people will need to wake up to this one. Me included. However it's hard to give up control of your money. Many try to control it from the grave.

 

[Offgrid Organic Farmer]

In 2016 my sister-in-law passed away, leaving everything she owned to her sister [my wife]. My wife was the executor and she was the sole heir. She went through a year long nightmare in dealing with the probate court, as the judge wanted to contest the will on behalf of that county.

After that experience, we decided to put most of our estate into LLCs with our sons as part owners.

 

[WyomingLife]

We address this issue by always having a really good T&E lawyer. Once a year, we call the lawyer and ask “do we need to update anything.” I wouldn’t trust (pardon the pun) any other way. We generally end up updating our documents every five years or so. We have never faced a sudden tax law change with imminent effect that somehow put our plans in any peril.

 

[audreyh1]

Give it away on this side of the grass.

Agreed!!

Take max advantage of the annual gift tax exemption. Currently a couple can gift each individual $30K per year with no reporting necessary. This can add up to a considerable amount over time.

Also, some estate planners are doing the work to gift more now as the IRS has ruled that no claw backs will occur after the estate exemption is cut in half again on 2026.
https://www.jdsupra.com/legalnews/irs-confirms-no-clawback-for-gifts-made-17786/

 

[Dash man]

Tomorrow we sign a new trust that helps with some issues regarding the SECURE Act. If there is a split Congress, nothing is likely to happen in the near future regarding the Federal Estate Tax. Over the next few years we will convert more of our 401k and tIRA to Roth accounts, and paying the tax will reduce our estate. We will also be gifting to our kids to reduce the chances of estate tax if changes occur in the future. This year because of COVID, we significantly increased our charitable gifts.
Bottom line is you can only plan with what you know.

 

[Scrapr]

This is a bit of a sore spot for me. As my wife was in hospice we talked to an Estate firm. Downtown...big $$$ for our area but probably not NYC or Chicago. Initially to set it up was about $8k. Oregon taxes estates over $1 million ea member of the Trust. By the time we went through the period after my wife passed we were close to $20k. I had a simple question on using money from my (late) wife's trust to purchase a new home. Hemming & hawing from them and then the bill came ....$3500. I'm done with them after that. We are pushing $25k so far. I felt it was a bit of bait & switch. No mention was made of the ongoing fees, just the initial set up

 

[audreyh1]

Good - I found the article I read recently from CNBC that discusses various ways to take advantage of the current high estate tax exemption. Large gifts count against your estate exemption and you don’t have to worry about future lowering causing a claw back in estate taxes according to the IRS. https://www.cnbc.com/2020/02/18/cre...w-to-take-advantage-of-big-tax-exemption.html

 

[chassis]

Giving it away on this side of the grass - is this the recommendation when no trust is in place, and probate is the expected liquidation method?

If a trust is in place, does the recommendation remain to give it away on this side of the grass?

@audreyh1
@foxfirev5
@Brat
@Stormy Kromer

 

[audreyh1]

Our heirs are not much younger than me. I don’t want them to have to wait until they are very old too. I don’t mean giving it all away - but giving a lot away.

Nothing to do with a trust. Plenty of ways to avoid probate if you have mostly investable assets. You can simply set up taxable accounts with transfer on death instructions, for example. IRAs with beneficiaries bypass probate.

 

[Sunset]

...
Also, some estate planners are doing the work to gift more now as the IRS has ruled that no claw backs will occur after the estate exemption is cut in half again on 2026.
https://www.jdsupra.com/legalnews/irs-confirms-no-clawback-for-gifts-made-17786/

Seems like a person could gift away nearly $6 million to lock in the current high exception amount, in case it goes back down to a measly ~$6M in the future.

ps - if you don't have enough heirs, I'm willing to receive some

 

[luckydude]

Hi all,

Does anyone have any thoughts on reasonable ways to minimize estate taxes?

The current exemption is about $11.58M, scheduled to drop to ~$6M in 2026, and there is the potential for the law to be changed in various ways to make the estate tax more aggressive (lower exemption amount, higher rate, changes to step-up).

I include the word "reasonable" in my question because I'd like to avoid aggressive or shady things that might be suggested to me by Facebook sponsored posts or the wilds of the Internet. I figure y'all are relatively reasonable folks who may have considered the question or have experience with it.

Assume no spouse. Assume kid/grandkid heirs. Assume ~25% federal marginal tax bracket.

Specific but still general questions:

1. How do you plan around such wide potential changes in the law? Someone with $3M today is probably pretty relaxed unless the exemption drops to $1M, but that change would result in a ~$800K tax bill, which is more than two Chipotle burritos.

2. Does the law in this area change with enough advance notice to where reasonable strategies can be implemented fast enough to make an appreciable difference?

3. If you're facing this question, how are you approaching the issue regarding tradeoffs between (a) income taxes now vs. estate taxes later, (b) retaining enough money to support the person vs. avoiding estate taxes, (c) tax rates of the owner vs. tax rates of the beneficiary, (d) other tradeoffs I may not have thought of.

4. How likely do you think it is that this area of the law will be changed and when and why? (Yeah, yeah, broken crystal balls. I know.)

Please avoid political and moral discussions and stick to strategies.

Thanks.

IMO, any speculation on how, when and why the estate tax and exemption may be changed in the future is futile. We simply don't know. For example, Congress could keep the exemption amount the same but do away with the step-up basis, so that your heirs could pay a lot of cap gain taxes when they sell inherited assets; Congress could also reduce the exemption amount but keep the step-up basis, so that your heirs would pay comparative little cap gain taxes when they sell. There's no way of knowing and trying to plan for that is futile.

So I suggest focusing on things you can control, which is making sure you have a proper estate planning strategy in place: avoid probate by setting up a living trust and pourover will; set up a durable power of attorney; set up an advanced healthcare directive; maybe set up POD for brokerage and bank accounts; have a list of all your assets, copies of all your statements/legal documents, and make sure your heirs know where to find them should you pass.

Once you have the basic structure set up, then you can making additional moves by nibbling at the corners depending on the size of your portfolio and the situation of your heirs. All these additional moves have pros and cons and a qualified professional can help. In general, the more $ you have, the more esoteric these moves become, and the more expensive it is to set them up.

For example, taking advantage of the annual gift exemption is a great idea, but have the heirs demonstrated enough financial acumen to be able to handle this gift, or would the gift simply spoil them? You could also set up an irrevocable insurance trust and fund it with a life insurance policy---you can shield a significant amount from estate tax this way, but you lose control of it in your lifetime. There are all sorts of other trust vehicles that I can't even name that you can utilize should your portfolio size warrants such moves.

Lucky Dude

 

[Stormy Kromer]

Giving it away on this side of the grass - is this the recommendation when no trust is in place, and probate is the expected liquidation method?

If a trust is in place, does the recommendation remain to give it away on this side of the grass?

@audreyh1
@foxfirev5
@Brat
@Stormy Kromer

DW and I have trusts in place and are under the current Federal limit, but not the state we live in. If we ever reach the Federal limit we will make annual gifts to work with it.

We don't want to die with the biggest pile we can accumulate, we would rather see it transfer to the next generations while we're alive.

 

[RunningBum]

I will continue gifting up to the exclusion amount, and would be more likely to exceed that if the need arises (such as help with a house down payment). I understand Lucky Dude's post above, but trickling gifts to them while living seems like a better method than giving them sudden wealth at inheritance time.

I plan to fully convert my IRA to a Roth anyway, but this is another motivation. Properly done to minimize taxes, the money has the same spending value whether I convert or not, but conversion reduces the estate total.

I probably won't do anything else at this time. If the exemption amount does go back down, and it looks likely I'll exceed it, I my look at life insurance options or a trust.

 

[chassis]

DW and I have trusts in place and are under the current Federal limit, but not the state we live in. If we ever reach the Federal limit we will make annual gifts to work with it.

We don't want to die with the biggest pile we can accumulate, we would rather see it transfer to the next generations while we're alive.

@Stormy Kromer Thanks. So you, with a trust in place, would rather transfer (give, gift) part of your estate to the next generation while you are alive. Is this right?

Are you saying that the recommendation to "give it away on this side of the grass" is a sound strategy, in the situation where a trust is in place?

 

[pb4uski]

I think if the exempton limits were to decline below our net worth we would likely do some early gifting and/or irrevocable living trusts like my Mom and Dad did when the exemption amount was lower.

However, whereas Mom and Dad put everything into the living trusts I think we would likely just put certain assets that cause us to exceed the limit into the living trusts... so some assets would avoid estate tax due the the exemption and the remainder would avoid estate tax as a result of the living trusts.

 

[cathy63]

Giving it away on this side of the grass - is this the recommendation when no trust is in place, and probate is the expected liquidation method?

If a trust is in place, does the recommendation remain to give it away on this side of the grass?

@audreyh1
@foxfirev5
@Brat
@Stormy Kromer

It depends on the trust.

If your trust is a revocable living trust, then it avoids probate but does nothing to avoid estate tax. The money and property in a trust that you control is part of your estate, even if it passes to your heirs outside probate. This is also true of TOD and POD accounts and deeds.

If you setup an irrevocable trust, then the money you put into it during your lifetime is subject to gift tax and that amount gets subtracted from your estate tax exemption. If you expect that you will die after 2026, and you believe the estate tax exemption will fall back to ~$5.5M as the current law specifies, and your estate is currently worth between $5.5M and $11.5M, then you might as well give away $6M now while you can still do it tax free. You could give it to an irrevocable trust that's designed to be distributed to your children after you die, or you could give it directly to the children. The tax treatment should be the same.

For married couples, there's also a Federal "portability" option where the surviving spouse can elect to combine the two exemptions. Couples whose combined net worth is greater than a single estate tax exemption but less than two exemptions can use that to avoid any tax when the second spouse dies without having to setup A/B trusts.

 

[Sunset]

.....

For married couples, there's also a Federal "portability" option where the surviving spouse can elect to combine the two exemptions. Couples whose combined net worth is greater than a single estate tax exemption but less than two exemptions can use that to avoid any tax when the second spouse dies without having to setup A/B trusts.

Thanks.... I had forgotten about this, so now I searched and found this simple explanation:
https://www.thebalance.com/federal-estate-tax-exemption-3505658

The trick will be to remember to do it within the time limits while still wrapped in grief and turmoil.

 

[Stormy Kromer]

@Stormy Kromer Thanks. So you, with a trust in place, would rather transfer (give, gift) part of your estate to the next generation while you are alive. Is this right?

Are you saying that the recommendation to "give it away on this side of the grass" is a sound strategy, in the situation where a trust is in place?

Yes. We do want to give away a significant portion of our estate while alive. If our net worth is in territory above the estate tax I feel we can do so very comfortably. We'll still die with a pile of money, but not as big because we want to help our family in the years when they need it (college, house down payments…)

The trusts have their purposes, mainly to avoid probate.

Everyone's situation is different and legal assistance is a necessity.

I want to avoid situations that I see when an older person won't give their grandchildren a Christmas gift because they are holding onto their wealth til they die.

 

[copyright1997reloaded]

I had stopped giving $ to my child trying to keep assets lower for FAFSA purposes. Now, DC is in school and got enough merit aid that getting financial aid is unlikely. So I am pondering reversing course and maxing out yearly contributions. I'm also considering paying school costs above that (instead of using 529 $) with the thought that the 529 funds can later be used for DC's (eventual) children. Also considering $ that would require form 709 filing.

On my own front, I am going to max out my bracket this year (24%, single) and possibly enough LTCG to get to but not exceed the NIIT limit (200k). Yesterday when the market popped on the open I sold some Apple ... which was like having a long time lover go away (this is stock I've owned a long long time). (I still have lots of Apple left but it is my (by far) highest single stock risk.)

 

[youbet]

Giving it away on this side of the grass - is this the recommendation when no trust is in place, and probate is the expected liquidation method?

If a trust is in place, does the recommendation remain to give it away on this side of the grass?

@audreyh1
@foxfirev5
@Brat
@Stormy Kromer

Your emphasis on "a trust in place" is confusing me. Please explain. How does having a trust in place impact decisions on lowering your estate value via gifting?

 

[Ian S]

I feel very fortunate as I don't ever see myself or my husband ever being in a position to have to worry about the estate tax!