King & Wood, P.A.

Can You Leave an IRA to a Beneficiary?

“Maximize the impact of your legacy and make sure it supports the people and causes that are most important to you.”

Conversations about death and legacies aren’t always easy. However, defining what matters most to a person is a good way to start estate planning. IRAs can play an important role in estate planning and legacy creation, as discussed in a recent article entitled “IRA Gifts at Death” from The Street.

Let’s say someone has a large portion of their assets in an investment account, a Roth IRA and a traditional IRA. If they want to avoid having their estate go through probate but aren’t in love with the idea of building trusts, they need to be sure their IRAs have beneficiaries. At their passing, the assets will flow directly to the beneficiaries.

Make sure that at least one living beneficiary is on the account. If the primary beneficiary is a spouse, be sure to also have contingent beneficiaries, or designate the beneficiary as “per stirpes,” which means if the named beneficiary passes before the account owner, their share of the assets automatically passes to their lineal descendants.

If there’s no valid beneficiary, the contents of an IRA of any kind could end up in the probate estate, creating a nightmare for heirs.

If an intended beneficiary is a charitable organization, passing an IRA is a powerful giving strategy. The organization must be a 501(c)(3), a tax-exempt organization. When IRAs are passed to the charity, the charity doesn’t pay taxes on the gift.

Individual beneficiaries do have to pay taxes on assets received from traditional IRAs, and when and how much they pay depends upon their relationship to the IRA owner. If the recipient is not the spouse, not a minor and not a disabled adult, the heir will need to take taxable withdrawals from the traditional IRA over the course of ten years from the date of death of the original account owner. Some people take a set amount annually, so they can plan for the taxes due. For others, a low-income year is the time to take withdrawals, since their tax bracket may be lower.

Another IRA distribution strategy is to divide IRAs into separate accounts, allowing for increased control over the amount of assets passing to a specific beneficiary. One IRA could be used for your charitable giving, while another IRA could be used to benefit family members.

Changing beneficiaries on your IRA is relatively easy. Checking on beneficiary names should be done every time you review your estate plan, which should happen every three to five years. Your estate planning attorney will be able to help determine the best strategy for your IRAs. Generally speaking, traditional IRAs are best to gift for charities. Roth IRAs are best to gift to family or loved ones. This is because the money in a Roth IRA is inherited tax free and can remain tax free for a number of years.

Reference: The Street (July 17, 2022) “IRA Gifts at Death”

What Is the Best Way to Leave Money to Children?

“Providing for future generations shouldn’t be (overly) taxing. To manage taxes as you pass down your assets, look into UTMAs, 529s, child IRAs and trusts.”

Parents and grandparents want what’s best for children and grandchildren. We love generously sharing with them during our lifetimes—family vacations, values and history. If we can, we also want to pass on a financial legacy with little or no complications, explains a recent article titled “4 Tax-Smart Ways to Share the Wealth with Kids” from Kiplinger.

There are many ways to transfer wealth from one person to another. However, there are only a handful of tools to effectively transfer financial gifts for future generations during our lifetimes. UTMA/UGMA accounts, 529 accounts, IRAs, and Irrevocable Gift Trusts are the most widely used.

Which option will be best for you and your family? It depends on how much control you want to have, the goal of your gift and its size.

UTMA/UGMA Accounts, the short version for Uniform Transfers to Minor or Uniform Gift to Minor accounts, allows gifts to be set aside for minors who would otherwise not be allowed to own significant property. These custodial accounts let you designate someone—it could be you—to manage gifted funds, until the child becomes of legal age, depending on where you live, 18 or 21.

It takes very little to set up the account. You can do it with your local bank branch. However, the funds are taxable to the child and if an investment triggers a “kiddie tax,” putting the child into a high tax bracket and in line with income tax brackets for non-grantor trusts, it could become expensive. Your estate planning attorney will help you determine if this makes sense.

What may concern you more: when the minor turns 18 or 21, they own the account and can do whatever they want with the funds.

529 College Savings Accounts are increasingly popular for passing on wealth to the next generation. The main goal of a 529 is for educational purposes. However, there are many qualified expenses that it may be used for. Any income from transfers into the account is free of federal income tax, as long as distributions are used for qualified expenses. Any gains may be nontaxable under local and state laws, depending on which account you open and where you live. Contributions to 529 accounts qualify for the annual gift tax exclusion but can also be used for other gift and estate tax planning methods, including letting you make front-loaded gifts for up to five years without tapping your lifetime estate tax exemption.

You may also change the beneficiary of the account at any time, so if one child doesn’t use all their funds, they can be used by another child.

From the IRS’ perspective, a child’s IRA is the same as an adult IRA. The traditional IRA allows an immediate deduction for income taxes when contributions are made. Neither income nor principal are taxed until funds are withdrawn. By contrast, a Roth IRA has no up-front tax deduction. However, any earned income is tax free, as are withdrawals. There are other considerations and limits.  However, generally speaking the Roth IRA is the preferred approach for children and adults when the income earner expects to be in a higher tax bracket when they retire. It’s safe to say that most younger children with earned income will earn more income in their adult years.

The most versatile way to make gifts to minors is through a trust. There’s no one-size-fits-all trust, and tax rules can be complex. Therefore, trusts should only be created with the help of an experienced estate planning attorney. A trust is a private agreement naming a trustee who will manage the assets in the trust for a beneficiary. The terms can be whatever the grantor (the person creating the trust) wants. Trusts can be designed to be fully asset-protected for a beneficiary’s lifetime, as long as they align with state law. The trust should have a provision for what will occur if the beneficiary or the primary trustee dies before the end of the trust.

Reference: Kiplinger (May 15, 2022) “4 Tax-Smart Ways to Share the Wealth with Kids”

How Do I Plan for Taxes after Death?

“Ben Franklin once said, ‘… nothing can be said to be certain, except death and taxes.’ For all certainties in life, the best thing you can do is plan for their eventual occurrence.”

Let’s get this out of the way: preparing for death doesn’t mean it will come sooner. Quite the opposite is true. Most people find preparing and completing their estate plan leads to a sense of relief. They know if and when any of life’s unexpected events occur, like incapacity or death, they have done what was necessary to prepare, for themselves and their loved ones.

It’s a worthwhile task, says the recent article titled “Preparing for the certainties in life: death and taxes” from Cleveland Jewish News and doesn’t need to be overwhelming. Some attorneys use questionnaires to gather information to be brought into the office for the first meeting, while others use secure online portals to gather information. Then, the estate planning attorney and you will have a friendly, candid discussion of your wishes and what decisions need to be made.

Several roles need to be filled. The executor carries out the instructions in the will. A guardian is in charge of minor children, in the event both parents die. A person named as your attorney in fact (or agent) in your Power of Attorney (POA) will be in charge of the business side of your life. A POA can be as broad or limited as you wish, from managing one bank account to pay household expenses to handling everything. A Health Care Proxy is used to appoint your health care agent to have access to your medical information and speak with your health care providers, if you are unable to.

Your estate plan can be designed to minimize probate. Probate is the process where the court reviews your will to ensure its validity, approves the person you appoint to be executor and allows the administration of your estate to go forward.

Depending on your jurisdiction, probate can be a long, costly and stressful process. In Ohio, the law requires probate to be open for at least six months after the date of death, even if your estate dots every “i” and crosses every “t.”

Part of the estate planning process is reviewing assets to see how and if they might be taken out of your probate estate. This may involve creating trusts, legal entities to own property and allow for easier distribution to heirs. Charitable donations might become part of your plan, using other types of trusts to make donations, while preserving assets or creating an income stream for loved ones.

Minimizing taxes should be a part of your estate plan. While the federal estate tax exemption right now is historically high $12.06 million per person, on January 1, 2025, it drops to $5.49 million adjusted for inflation. While 2025 may seem like a long way off, if your estate plan is being done now, you might not see it again for three or five years. Planning for this lowered number makes sense.

Reviewing an estate plan should take place every three to five years to keep up with changes in the law, including the lowered estate tax. Large events in your family also need to prompt a review—trigger events like marriage, death, birth, divorce and the sale of a business or a home.

Reference: Cleveland Jewish News (May 13, 2022) “Preparing for the certainties in life: death and taxes”

Mega-IRAs Could Be a Source for New Public Policies

“Congressional Democrats are weighing a new type of required distribution from individual retirement accounts, based on the account value instead of age, according to a discussion list of policy ideas obtained by CNBC.”

There are few specifics but owners of “mega” IRA accounts worth more than $5 million might be presented with new withdrawal requirements, if legislation for a new national safety net becomes law. For a very small slice of the American population, IRAs have become million and even billion dollar tax deferred accounts, according to a recent article from CNBC titled “Democrats may change the rules for ‘mega’ IRAs over $5 million."

There are roughly two dozen tax categories being considered by Congress to help raise money for the expansion of the nation’s safety net, which for now is anticipated to have a $3.5 trillion price tag.

The policy concept was spotted on a draft of ideas lawmakers assemble before formally pitching the ideas before their colleagues. Floating game-changing ideas to gauge response is part of today’s legislative process.

The list didn’t include a specific amount but suggests a limit of $5 million. It also included information regarding the number of mega IRA accounts. Apparently, the number of IRA accounts worth more than $5 million has tripled in the past ten years.

In contrast, the average American’s IRA is valued around $39,000.

The idea is part of a broader theme of raising revenue from the wealthy to pay for social needs, like education, address climate change, assist working families with paid leave, childcare and other basic human needs.

It may have been sparked by a recent report that one of the founders of PayPal owns a Roth IRA valued at $5 billion. IRAs were created as a means of encouraging working Americans to save for retirement. However, they have become huge tax shelters for the wealthy.

More than 28,600 taxpayers owned IRAs worth more than $5 million in 2019, but they account for less than a tenth of 1% of the 70 million Americans who have a traditional or Roth IRA. The mega accounts add up to $280 billion, or about 3% of the total $8.6 trillion owed in IRAs.

Limiting the size of tax-deferred retirement accounts isn’t new. Several attempts have been made to cap the amount in IRAs or change distribution rules.

The final legislation may not be known for some time, but one response to this proposal would be to convert traditional IRAs to a Roth. Paying taxes at the time of the conversion, even if done over time, could be useful to eliminate having to pay taxes on the funds, if withdrawal rules change. In addition, there are no Required Minimum Distributions (RMDs) on Roth IRAs, so funds can grow tax free for the life of the owner.

Reference: CNBC (Sep. 8, 2021) “Democrats may change the rules for ‘mega’ IRAs over $5 million”

Can You Have Bitcoin in IRA?

“The cryptocurrency market climbed to more than $2 trillion over the weekend. Investors who want to get in on those gains may want to add those assets to their IRA.”

Experts on both sides of the cryptocurrency world agree on one thing: it’s still early to put these kinds of investments into retirement accounts, especially IRAs. A recent article from CNBC, “Want to put bitcoin in your IRA? Why experts say you may want to rethink that,” explains why this temptation should be put on pause for a while.

Investors who have remained on the sidelines on cryptocurrency are taking a second look as this new asset class surpassed the $2 trillion mark in late August. Looking at retirement accounts flush with positive growth from stocks, it seems like a good time to take some gains and test the crypto waters.

However, the pros warn against using cryptocurrency in retirement accounts. “Not just yet” is the message from both bulls and bears. One expert says using cryptocurrency in a retirement account is like taking a delicate and exotic animal out of its natural element and putting it in a concrete zoo. Cryptocurrency is not like “regular” money.

The accounts are structured differently The average investor also won’t be able to hold the keys to their own cryptocurrency investment. It’s a buy and hold, with no individual ability to move the assets around. While there are some investment platforms working to change that, an inability to move assets, especially such volatile assets, is not for everyone.

Cryptocurrency is a much riskier investment. A quarterly look at account updates would be like only checking your retirement accounts every five years. Cryptocurrency values are volatile, and an account balance can change dramatically from one week, one day or even one hour to the next one. Crypto is a 24/7/365-day market.

Self-directed IRAs are allowed to have crypto assets, but just because you can doesn’t mean you should. Another reason: stocks, bonds and real estate have a stated market value, which means they are taxed when withdrawals are taken. However, the expected value of cryptocurrencies is not clear. They are not regulated, while IRAs are among the most highly regulated accounts. This is a big reason as to why most IRA account administrators don’t permit cryptocurrencies in their accounts.

Investment decisions are based on the eventual use of the funds. For IRAs, the intention is not to lose money, and ideally for it to grow, so there is more money for your retirement, not less. Separate margin or trading accounts are typically used for riskier investments.

One expert advised limiting cryptocurrency investments to 5% of your total retirement accounts. If money is lost, it won’t destroy your retirement, and any wins are extra money. Another expert says investing such a small amount won’t be worth the time or effort, so don’t even bother.

For those who are determined to get in the game, a Roth IRA may be preferable if you have an extended time horizon and can stand the ups and downs of cryptocurrency investments. The appreciation in a Roth IRA will be tax-free.

Reference: CNBC (Aug. 17, 2021) “Want to put bitcoin in your IRA? Why experts say you may want to rethink that”

Make the Most of a Roth IRA, Even If You’re Not Ultra-Wealthy

“For traditional 401(k) plans and IRAs, you generally get a tax break when you make contributions and then pay taxes on the withdrawals in retirement. In contrast, Roth versions of those accounts come with no upfront tax break, but qualified withdrawals are excluded from federal income taxes.”

While it may seem like only the ultra-wealthy benefit from a Roth IRA, this retirement tool is an excellent tax shelter that anyone can use, reports CNBC.com in the recent article “The ultra-wealthy have made full use of Roth individual retirement accounts. Here’s how you can do the same.” One of PayPal’s founders, Peter Thiel, had $5 billion in a Roth IRA as of 2019, according to a ProPublica report. It said that he used a self-directed Roth account, which allows the owner to hold alternative assets, like shares in a private company or real estate that generally can’t be placed in a regular Roth.

Traditional 401(k) plans and IRAs offer a tax break, when contributions are made. Taxes are paid upon withdrawal, which is supposed to happen only after a certain age when you’ve retired. By contrast, the Roth versions of the 401(k) and IRA don’t have the tax break up front—you have to pay taxes on the money or assets when making contributions—but there are no taxes paid upon withdrawal, and there are no required withdrawals, as there are with traditional IRAs and 401(k)s.

You pay income taxes on the money placed into the account, and then it grows tax free. You can take it out anytime, as long as the account has been owned for at least five years and you are age 59½ or older. Self-directed Roth IRAs permit tax-free growth and untaxed distributions plus investments can be made that are not available in regular Roth accounts.

Theil had private company shares in his self-directed Roth IRA, before PayPal was a publicly traded company. He benefited from both timing and savvy investment skills.

Self-directed IRAs are generally available only through specialized custodians. Brand-name financial companies don’t offer them. The custodians that hold self-directed IRAs do not manage the account or police what investments are placed into the accounts, so you’ll need the advice of a tax-savvy estate planning attorney to be sure you are following the rules. Note that there can also be valuation issues. The value of alternative assets is not as clear as publicly traded securities. You’ll need to get the value right, so you don’t break any tax laws. Once assets are in the account, you can sell them and use the proceeds to purchase other instruments in the account, all under the same tax-free Roth protection.

Even if you don’t use a self-directed Roth IRA, the standard Roth IRA yields many benefits. We don’t know what the future tax environment will be, but tax-free withdrawals in the future, combined with high-growth assets, make the Roth IRA a good choice for retirement nest eggs.

Reference: CNBC.com (June 24, 2021) “The ultra-wealthy have made full use of Roth individual retirement accounts. Here’s how you can do the same”

Michael Jackson Estate’s Big Win against IRS in Tax Court

“A ruling that Michael Jackson’s image and likeness at the time of his death were worth about $157 million less than the IRS estimated warns the agency not to look too far down the road, when assessing the value of a celebrity’s estate.”

Estate planning lawyers agree: the recent victory of Michael Jackson’s estate in U.S. Tax Court is a clear signal that the IRS should be more cautious when assessing the value of an estate’s assets. In the article from Bloomberg Tax, “Michael Jackson Estate’s Tax Win a Warning to Aggressive IRS,” one attorney says it is reasonable to think that the court reacted negatively to the IRS’ being overly aggressive.

It’s also possible that the IRS’ memory of the pop star’s pre-death fame was based on Jackson’s post-death popularity.

The dispute, which began in 2013, attracted wide attention and exposed a big disparity in how the IRS and the Jackson estate valued the pop star’s image and likeness, which was only one part of his estate. While the estate looked at current income and revenue, the IRS took a far more opportunistic approach, eyeing the income from future shows and merchandise.

The $157 million difference came down to the IRS’s inclusion of revenue streams that the Tax Court concluded were not foreseeable at the time of the entertainer’s death. Revenues from the Cirque du Soleil show, a movie and branded merchandise were created only after Michael Jackson died.

When Jackson died in 2009, there had been severe damage to his image, including allegations of sexual abuse of children and eccentric behavior. He was cleared of charges, but the damage to his image took a toll on his popularity. His notoriety undercut the value of his name and likeness while he was alive.

The sole expert witness offered by the IRS was problematic as well. He was found to have lied multiple times and refused to answer questions directly through his testimony, which the Tax Court did not like.

The case may increase interest in changing estate tax laws, given the difficulty of valuing speculative assets based on what was reasonably foreseeable at the time of a person’s death. It may be better to take a “wait and see” approach, rather than guessing at what the person might be worth in the near and distant future.

That approach might put some estates in limbo for years, forcing executors to retain assets during that time. When beneficiaries want to receive their inheritance immediately, this could present problems for executors.

One advisor says that a rational approach would be for estates to exclude likenesses or the ability to exploit a name and image, and then have distributed assets taxed after death at ordinary income rates.

For celebrities and those with a high value estate, expect more scrutiny from the IRS. The IRS is looking for revenue, and any high-profile assets will attract attention.

Non-celebrities should take heed as well. The IRS is looking for revenue, and an estate plan with strong tax planning will protect families from onerous federal and state estate taxes.

Reference: Bloomberg Tax (May 5, 2021) “Michael Jackson Estate’s Tax Win a Warning to Aggressive IRS”

Will Inheritance and Gift Tax Exemptions Change in 2021?

“The increase in the exemption is set to lapse after 2025. However, the Treasury Department and the IRS issued “grandfather” regulations in 2019 allowing the increased exemption to apply to gifts made while it was in effect, if Congress lowers the exemption after those gifts.”

The federal estate and gift tax exemption is applied to the sum total of a person’s taxable gifts during life and the assets they leave behind at death. In 2017, Congress doubled the exemption, starting in 2018. That number continues to rise with inflation until 2025, unless the laws are changed. According to the article “Estate and Gift Taxes 2021—2022: Here’s What You Need to Know” from The Wall Street Journal, the 2017 expansion cut the number of taxable estates from about 8,000 to about 3,000 in 2019.

Gift Tax Exemptions. In 2020, the exemption was $11.58 million per individual ($23.16 million per married couple). An inflation adjustment increased this amount to $11.7 million per person and $23.4 million per couple. For 2020 and 2021, the top estate-tax rate is 40%.

That increase is set to end in 2025, but both the Treasury Department and the IRS issued regulations in 2019 allowing the increased exemption to apply to gifts made while this increase is in effect, even if Congress lowers the exemption after those gifts were made.

Capital Gains After Death. Under current law, investments owned at the time of death are not subject to capital gains taxes. This is referred to as a “step-up in basis.” Congress and the Biden administration are now considering reducing or eliminating this benefit as a means of raising revenue.

Annual Gift Tax Exemptions. In 2020 and 2021, the annual gift-tax exclusion is $15,000 for each individual donor, for each individual recipient. You can give anyone up to $15,000 in assets per year and not owe any federal gift taxes. A generous couple with two married children and six grandchildren may give away $300,000 to their ten descendants. The couple could also give $30,000 to as many other people as they want, friends or family members or perfect strangers.

Above the $15,000 per donor, per recipient, gifts are subtracted from the lifetime gift and estate-tax exemption. Annual gifts are not deductible for income tax purposes and they are not considered income for the recipient. If the gift is not cash, the giver’s “cost basis” does carry over to the recipient.

Other Tax-Free Gifts. Another way to make a gift is to pay educational or health expenses for another person. The payment must go directly from the person giving the gift to the college, private school, or medical provider on behalf of another person. Otherwise, it will not have any tax benefit for the person giving the gift.

While a generous gift is always welcome, making a gift that is part of a holistic estate plan benefits you and your recipients. Speak with an experienced estate planning attorney about the role of gifting in your overall estate plan.

Reference: The Wall Street Journal (April 8, 2021) “Estate and Gift Taxes 2021—2022: Here’s What You Need to Know”

Tax Planning Strategies for 2021

“Although uncertainty surrounding the likelihood of tax reform continues for the moment, there are still several wealth transfer strategies that can be considered by those wanting to make gifts.”

The uncertainty surrounding the election and possibility of changes to the tax law led many families to make substantial wealth transfers in 2020, especially as the historically high gift and generation-skipping transfer (GST) tax exemptions were so advantageous. This recent article from Financial Advisor, “No More Gift Tax Exemption? Additional Planning Strategies To Consider for 2021,” discusses the options that are still available for 2021.

Gifting is Still a Good Strategy. Even if you used your gift and GST tax exemptions, you may still make additional gifts outright or in trust using the 2021 inflation adjusted amount. The gift and GST tax exemptions are indexed for inflation, so this year the exemptions went from $11.58 million in 2020 to $11.7 million for 2021. Annual exclusion gifts allow individuals to make gifts up to $15,000 per person, and $30,000 for married couples, which do not count towards the gift and estate tax exemptions.

Direct payments for medical and tuition payment are still good options that won’t deplete the annual exclusion or gift and GST tax exemption. Just be sure to make the payment directly to the qualified educational institution or medical provider.

Grantor Retained Annuity Trusts (GRATS) still work. A GRAT is a special type of irrevocable trust. The grantor makes a gift of property in trust, retaining the right to an annual payment (annuity) from the trust for a specified amount of time. They can be used for a number of different assets, including assets expected to appreciate significantly. Check with your estate planning attorney to be sure this is a good option for you. If the grantor dies within the annuity term, the entire value of the trust generally will be included in the estate, as if it had never been created.

Sale to Grantor Trust. This strategy takes advantage of the differences between the income and transfer tax treatment of irrevocable trusts. The goal is to transfer anticipated appreciated assets at a reduced gift tax cost. In return for the transfer of property, the trust gives the grantor a note, which carries a market rate of interest and usually requires a balloon payment of principal at the end of the note’s term. In most cases, when the trust is a grantor trust, the grantor and the trust are treated as the same taxpayer for income tax purposes, but as two separate entities for transfer tax purposes. Because of this, neither the sale nor the note payments trigger income taxation.

Intra-Family Loans. These loans can be made at lower rates than by commercial lenders without the loan being deemed a gift. This lets an individual help their family members financially, without triggering additional gift tax. Wealth may be shifted, if the loan assets are invested by the borrower and earn a higher return than the required interest rate. Interest is to be paid within the family, and not to a third-party lender.

The intra-family loan establishes both a bona fide creditor relationship and the payment of interest. Family loans can be financially advantageous and emotionally tricky, so navigate with care. Your estate planning attorney will create the proper documents and all parties need to be clear on the details.

These strategies will work best when integrated into your estate plan. Discuss with your estate planning attorney to ensure that they will align with your long-term goals, as well as your tax planning.

Reference: Financial Advisor (Feb. 24, 2021) “No More Gift Tax Exemption? Additional Planning Strategies To Consider for 2021”

Federal Estate Tax Exemption Sunset Is Not Far Off

“Maybe not tomorrow, but the sunset of our historically high estate tax exemptions is coming—and with the election on its way, it could be sooner than you think.”

In 2018, the Tax Cuts and Jobs Act (TCJA) doubled the lifetime gift, estate, and generation-skipping tax exemption to $11.18 million from $5.6 million. With adjustments for inflation, that exemption in 2020 is $11.58 million, the highest it’s ever been, reports the article “Federal Estate Tax Exemption Is Set to Expire—Are You Prepared?” from Kiplinger. However, this won’t last forever.

There’s a limited time to this historically high exemption. The window for planning may be closing soon. The high amount is set to sunset at the end of 2025, but the impact of a global pandemic and the upcoming presidential election will likely accelerate the rollback.

As of this writing, many states have already eliminated their state estate taxes, although 17 states and the District of Columbia still have them. The estate planning environment has changed greatly over the last decade. However, for families with large assets, and for those whose assets may reach Biden’s proposed and far lower estate tax exemption, the time to plan is now.

Gifting Assets Now to Reduce Estate Taxes. The IRS has stated that there will be no clawback on lifetime gifts, so any gifts made under the current exemption will not be subject to estate taxes in the future, even if the exemption is reduced.

Keep in mind that when gifting assets, to make a gift complete for tax purposes, you must relinquish ownership, control, and use of the assets. If that is a concern, married couples can use the Spousal Lifetime Access Trust or SLAT option: an irrevocable trust created by one spouse for the benefit of the other. Just be mindful when funding irrevocable trusts of gifting any low cost-basis assets. If the trust holds assets that appreciate while in the trust for extended periods of time, beneficiaries could be hit with tax burdens.

Take Advantage of Lower Valuations and Low Interest Rates. The value of many securities and businesses have been impacted by the pandemic, which could make this a good time to consider gifting or transferring assets out of your estate. Lower valuations allow a greater portion of assets to be transferred out of the estate, thereby reducing the size of the estate.

With interest rates at historical lows, intra-family loans may be an effective wealth-transfer strategy, letting family members make loans to each other without triggering gift taxes. Intra-family loans use the IRS’ Applicable Federal Rate–now at a record low of between 0.14%-1.12%, depending upon the length of the loan. These loans work best when borrowed funds are invested and the rate of return earned on the invested loan proceeds exceeds the loan interest rate.

Avoid Last-Minute Rush by Starting Now. This type of estate planning takes time. The more time you have to plan with your estate planning attorney, the less likely you are to run into challenges and hurdles that can waste valuable time. When estate tax laws change, estate planning attorneys get busy. Creating a thoughtful plan now may also help prevent mistakes, including triggering the reciprocal trust doctrine or the step transaction doctrine. Planning for asset protection and distribution allows families to control how assets are distributed for many generations and to create a lasting legacy.

Reference: Kiplinger (Oct. 14, 2020) “Federal Estate Tax Exemption Is Set to Expire—Are You Prepared?”