At M3 we’re always focused on investing in the market and having a long-term outlook. We are the gatekeepers of your wealth, as such our aim is to help you preserve your wealth for your family’s future.
Given the current political environment – and with the 2020 elections quickly approaching – we think it is important to talk about estate planning to help ensure that your long-term goals and your life’s work are safeguarded. Estate planning is a broad topic in and of itself. For this post we will focus on gifting your estate, the benefits and things to watch for. So, let’s dive right in.
Estate Planning: Gift it, Leave it or Lose it
Even centrist Democrats like Kamala Harris and Joe Biden have voiced support for a repeal of the GOP’s tax cuts. This means that should Democrats win control of the White House and Congress next year, the tax cuts would face serious political headwinds, and most likely would not survive unscathed. If moderates have taken this position, it is all but certain that Senators Sanders and Warren would go even further.
There are quite a few ramifications for your estate, so let’s break them down.
What does that mean for estate planning?
The tax bill temporarily doubled the exemption amount for estate and gift taxes to $10 million indexed for inflation. In addition to that, a tax provision called portability allows couples who do proper planning to double the exemption. Therefore, accounting for inflation, a couple could shelter $22. 4 million in assets from estate taxes in 2018.
We pay taxes on the income we earn, sales taxes on what we buy, property taxes on our assets, taxes on our investments as they grow, and then everything we own is trapped in our Estate Tax Box. The IRS does allow to pass 100% of one’s assets to their spouse. But those assets (plus what our spouse owns) will be in the estate tax box and subject to an estate tax eventually anyways.
This effectively puts a toll gate between you and your children and grandchildren. Luckily, by planning accordingly, it is possible to pursue the ultimate goal: a Zero Estate Tax Plan.
The objective here is to keep everything you buy or accumulate outside your estate tax box and to transfer assets inside the box, outside of it to avoid the dreaded death tax.
Take advantage – it’s a limited time offer. The bill’s sunset means the estate and gift taxes exemption would revert back to the $5 million base in 2026, but Democrats have made very clear they are keen on repealing the tax cuts. It is therefore of paramount importance to consider taking advantage of the expanded gifting capacity under the Trump tax cuts, with a use it or lose it approach, before the end of 2020.
Gifting today – Insuring your family’s tomorrow
The exemption applies to the estate and gift tax, so if you give your assets away now you will be protected if a future Congress or Administration wanted to bring them back or lower exemptions.
Additionally, when gifting during your lifetime, your heirs benefit from the gift plus future growth. By using a trust with a fancy name called IDGT (Intentionally Defective Grantor Trust), you can donate your assets using your exclusion and lifetime exemption and retain the responsibility to pay the income taxes due each year on the growth of the trust.
Who retains control though?
It is understandable that often clients are reluctant to make large gifts, as they don’t want to give up control of the asset and they worry about what will happen if they end up needing the money in the future. It makes sense that if you give away an asset that you also give up control. There are however some options your legal and tax advisors can suggest that may give you input in how assets will be managed, distributed, and even provide your spouse access if you need the funds.
For example, a Family LLC (FLLC) can be set up. This allows to transfer assets you believe are going to appreciate into the LLC while splitting the LLC between manager interest and economic interest. Thus, you can retain the managing interest in the LLC (as CEO with 100% control of the company and all its assets). Then, the economic interest of the LLC can be donated to a trust for the benefit of your heirs. This gift can count against your annual exclusion and lifetime exemption.
Another option is Spousal Lifetime Access Trust (SLAT). You as the grantor can make your spouse a beneficiary of an irrevocable trust and allow them to have access to all the income the trust earns, and even the principal if they need it. You can even set up a line of credit between the trust and your spouse in the event that there is a temporary cash need.
The ultimate goal is that you can provide backdoor access to these assets and if you do not need the funds, then they all will pass to your heirs as beneficiaries outside the estate tax box. Trust provisions can be used to protect your spouse, children and even grandchildren and allow you to keep assets in the family in the event of a divorce or other adverse circumstances.
In other words, the SLAT removes assets from an individual’s estate but transfers the assets to an irrevocable trust for the benefit of his or her spouse. The benefit is that those assets are out of the individual’s estate, allowing them to take advantage of the increased estate tax exemption, while still retaining a degree of control over those assets via their spouse during their lifetime.
What else is available?
What if you already used all of your gift capacity and still are looking at a large estate tax bill. There are many options that do not include any gift or can use your annual exclusion, such as GRAT’s, Grantor Retained Annuity Trusts, Installment sales to a IDGT, purchase of a vacation home by an existing trust, and the donors pay rent (gift tax free transfer) to use the home, private loan to an insurance trust to create income and estate tax free like insurance, cash settled options and charitable lead trusts, just to name a few.
Everyone’s situation is unique, and financial planning is a deeply personal experience. These are only two of the many options that, with a little creativity, can allow you to safeguard your family’s future financial wellbeing.
The estate planning toolkit is a lot like my neighbor’s garage: no matter what I need, he has the right tool! Based on our extensive experience working with very sophisticated and complex estates over the past 25 years, at M3 we have a wide array of tools at our disposable for your specific circumstance – far beyond FLLCs and SLATs.
M3 Estate Planning Services
At M3 we strive to be the long-term gatekeepers of your wealth. Here, we are highlighting the chance to take advantage of this opportunity before it is gone.
The estate tax mitigation techniques that we employ at M3 Wealth Advisors for our clients allow us to make strategic tax considerations on a legacy plan – something that most individuals can benefit from.
Given the possibility of a repeal of the GOP tax cuts in 2021, we recommend considering estate planning now, before it is too late. Take the first step by clicking the button below to connect with us for a free consultation
M3 Wealth Advisors and Integrated Financial Partners do not provide tax or legal advice.