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2021 Readiness - Estate and Gift Tax Planning Tips

We understand the importance of considering all the Estate and Gift Tax planning options when it comes time to prepare for a new year and a new tax season.

ESTATE AND GIFT TAX

The current, ultra-high estate and gift tax exemptions are due to sunset after 2025 – the Biden tax platform includes reducing these exemption levels to much lower historic norms, possibly before 2025.

The Federal estate and gift tax system has been revised several times over the last 20 years. Prior to the 2001 tax cuts implemented during the Bush administration, the estate and gift tax exemption amount was $675,000. The top marginal rate for estate tax was 55%. Over the next 20 years, the estate/gift tax exemption amounts have increased 20-fold.

Historical Gift Tax Exemption Amounts (Per Person) Source: IRS, FinancialSamurai.com
Source: IRS
Strategies that can help to minimize the estate and gift tax include:
  • Fully utilize the historically high Lifetime Unified Gift/Estate Tax exemption
    $11.58M in 2020 ($23.16 M if MFJ). Will be reduced to $5M (plus indexation) after 2025 and may be reduced to “historic norms” before 2025 under a Biden administration.
  • Use the Annual Gift Tax Exclusion amount
    $15K per individual recipient of a gift.
  • Charitable gifts of cash
    For 2020 only, tax deduction of up to 100% of AGI may be claimed for cash gifts to a public charity. Outside of 2020, gifts of cash to public charities would be deductible up to 60% of AGI. The AGI limitation for cash gifts to a Donor Advised Fund remains 60%. All gifts to charity remove the asset permanently from the donor’s estate without estate or gift tax consequences.
  • Charitable gifts of appreciated property
    Deductible at Market Value for stocks and real estate, subject to 30% AGI limitation.
  • Direct gifts of tuition and medical expenses
    Are not taxable gifts – no limit.
  • Inter-generational loans
    These can be made free of gift tax. Interest can be funded using annual gift tax exclusion of $15,000.

TRUST AND PARTNERSHIPS
  • Qualified Personal Residence Trust
    Compresses the Gift Tax transfer valuation due to carve-out of the right to reside in the property. The donor must survive the trust term to be effective. Gift tax efficient.
  • Grantor Retained Annuity Trust
    For those who want asset growth to pass to next generation free of gift/estate tax. Donor transfers assets likely to appreciate to a GRAT but retains an annuity from the assets. The appreciation of the assets while in the Trust goes to donor’s heirs after the Trust term free of Gift/Estate Tax. Gift tax efficient.
  • Charitable Remainder Trust (Split Interest)
    Effective vehicles for recognizing gains on appreciated assets tax efficiently. Defers capital gains tax over Trust term, creates an annuity for the donor from Trust assets and allows an up-front tax deduction for the remainder interest going to charity.
  • Charitable Lead Trust (Split Interest)
    Charity receives an annuity from Trust during the Trust term. The growth in the trust assets during the life of the Trust can pass to heirs/beneficiaries free of gift tax.
  • Family Limited Partnership (FLP)
    For those who wish to transfer business assets to the next generation, FLPs allow a discounted transfer value for Gift tax purposes while still retaining substantial operating control for the donor.
  • Irrevocable Life Insurance Trust
    Life insurance proceeds add to the insured’s estate (and estate tax) if owned directly by the decedent. Life insurance contracts should rather be held by a Life Insurance Trust with the insured’s family as beneficiary.

    The new year brings new opportunities and new transitions to explore when it comes to Estate and Gift Tax strategies. Contact us if you’d like guidance to navigate through these complexities.

    The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Baker Avenue Asset Management LP. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. All information is believed to be factual and up-to-date as of this writing and is subject to change. Before purchasing any investment, a prospective investor should consult with its own investment, accounting, legal and tax advisers to evaluate independently the risks, consequences and suitability of any investment.

    Any suggestion of cause and effect or of the predictability of economic or investment cycles is unintentional. Past performance is never a guarantee of future performance. Baker Avenue Asset Management LP may currently own or have previously owned a specific stock or company referenced, and a list of our past holdings can be found at the SEC website. Click to view full disclosures.