Estate Planning in 2020 – August 2020

For a number of reasons described below, we are now in an ideal environment for proactive tax and estate planning. Plans and strategies implemented now can save enormous amounts of taxes now and for future generations.

First, each person has a lifetime exemption from federal estate and gift taxes. This exemption protects assets up to a certain amount from estate and gift tax. The exemption is at an all-time high of $11.58 million per person ($23.16 million for a married couple) and is scheduled to be reduced to about $6 million at the end of 2025. The high exemption is “use it or lose it,” but if gifts are made under the higher exemption now, they will be unaffected by later reductions.

Second, the interest rates set by the IRS (based on rates set by the Federal Reserve) are extremely low. These IRS rates are used as required benchmarks in the most effective estate planning techniques, including family sales, loans, and trust transactions. Lower rates mean greater opportunities for flexible estate planning. As an example, the mid-term interest rate on intrafamily transactions is currently only 0.45%.

Third, the COVID-19 pandemic has created economic turmoil and uncertainty that directly affects the valuation of closely-held businesses. These adverse conditions may provide opportunity to lock in favorable low values for certain assets for estate tax purposes. For example, a business historically valued at $5 million might fairly be valued at $4 million today based on a recent drop in revenue and uncertain economic outlook.

Fourth, California and other states have recently enacted laws that allow assets of one irrevocable trust to be transferred to another irrevocable trust without court involvement. This process (sometimes called “decanting”) provides an efficient way to update, correct, or modify the terms of an irrevocable trust.

Fifth, a prevailing view in the tax planning community is that unfavorable laws may be enacted sooner rather than later. There are several reasons for believing this:

• At the federal level, the currently-pending “For the 99.8 Percent Act” seeks to slash exemption amounts and levy a 40% estate tax on amounts over $3.5 million (H.R. Bill 4857 sponsored by Jimmy Gomez-CA and S.309 Bill sponsored by Bernie Sanders-VT). Notably, this act specifically attacks the most effective estate planning techniques (using irrevocable grantor trusts) but it specifically protects estate plans that are already in place.
• Proposals have been introduced in California and other states to enact a state-level estate tax to raise revenue and combat economic inequality.
• The federal economic stimulus delivered in response to COVID-19 has substantially increased federal deficit that will need to be paid through increased tax revenues.
• In an election year, there is a distinct possibility a new congress and administration will push new legislation forward in a political backlash to Trump’s tax cuts.

Taken together, there is undeniably a concerted attempt from lawmakers to shift tax burdens onto wealthy individuals and business owners.

We hope this information is helpful and we strongly recommend we review your tax and estate planning together. Please let me know if you have any questions or would like to schedule a time to discuss further.