19 Dec Estate Tax Planning for 2020

As we approach the end of the decade, we look forward to what the 2020s will bring. One thing is certain: the gift and estate tax exemption is going to change. At Phelps LaClair, serving Chandler, Mesa, Phoenix and Scottsdale, we understand that moving targets create uncertainty. Let’s consider how to plan for the possibilities so we can take advantage of current opportunities.

2017 Tax Cuts and Jobs Act

Prior to 2018, the gift and estate tax exemption was set at $5.4 million. In December 2017, the Tax Cuts and Jobs Act increased the amount you can gift to others without a penalty at $11.4 million. If you exceed that amount, you will be subject to a 40% gift and estate tax. In 2020, the exemption will increase to $11.6 million. However, that will expire at the end of 2025. Then, the exemption will fall back to $5.4 million.

For those of you who are planning to gift a significant amount of their estate assets in order to reduce estate taxes, it is best to do it sooner rather than later. In a recent ruling, the IRS said that the assets gifted between 2018 and 2025 will not be counted against the estate after the tax overhaul expires in 2026. That means that the window of greatest opportunity is now open.

2020 Election

Another potential tax increase could happen as a result of the 2020 election. Several Democratic candidates seeking their party’s nomination have proposed major tax increases. Senator Sanders is calling for a 77% tax on estates exceeding $1 billion. Many other Democrat proposals seek to reduce the estate tax exemption before 2025. Shifting assets now would be a wise move given the current political uncertainty.

To gift or not to gift?

Every large gift that you give moves assets (and appreciation) out of your estate, reducing the amount that is subject to estate tax when you die. If your estate is valued at more than $11.4 million, your heirs will thank you for it. However, if your estate is valued at less that $5 million, the advantage of the larger exemption is lost because it would fall under the $5.4 million ceiling in 2026. In that case, we advise keeping the assets in the estate and let your heirs deal with any potential capital gains tax. The beneficiaries will not need to pay capital gains if they sell the assets immediately.

At Phelps LaClair, we take your estate seriously. We have 40 years of experience in estate planning. We understand the business of passing on an inheritance while protecting the estate and the beneficiaries. We offer a free first consultation so you can have confidence and peace of mind. The current gift and estate tax exemption could be the opportunity to add value to your estate for your heirs while reducing their tax exposure. Call us today. The new decade is right around the corner!