Is Now the Right Time to Review Your ‘Last Will & Testament’?

With the upcoming Presidential election and some important Congressional seats being contested, several questions have surfaced about the future of estate planning.

For the calendar year 2020, federal estate and gift tax exemption are at a historical high of $11,580,000. $23,160,000 for couples if proper planning is in place to take advantage of ‘portability’. For the last several years we have operated under this portability concept, in which the deceased spouse’s unused exemption (DSUE) with proper elections is transferred to the surviving spouse and added to his or her own exemption. 

Example of a Deceased Spouse's Unused Exemption 

Let’s assume we have a couple that has a total net worth of $15,000,000. But, when you get into the details, the husband owns $5,000,000 of the total worth with his wife owning the remaining $10,000,000.  If the husband were to pass first, in the simplest of situations, he would leave $6,580,000 of his DSUE to his surviving spouse, and at that point, her total exemption available at her death would be $18,160,000 ($6.580MM + her own $11.580MM).

What’s the Big Deal?

With numbers like these above, very few Americans have any problems right? WRONG. These exemption amounts discussed above expire at the end of 2025. However, if the Democrats win big in November, there is a good chance this exemption will fall drastically. This fall may occur as soon as 2021, to pre-2018 levels of about $5,000,000. Vice President Biden is on record calling for the exemption to be lowered.

Worst Case Scenario

So, let’s look at a worst-case futuristic scenario that could be very real:

The husband and wife have a total net worth of $6,000,000. The new administration has reduced the exemption to $5,000,000 and assets are split equally 50-50. Say the husband dies first and leaves an “I Love You Will” with all of his assets going to his spouse. What if the Executor elects NOT to file Form 706 “United States Estate Tax Return” in a timely fashion to elect portability? Then, the day after her husband’s death, his surviving spouse is now worth $6,000,000, with only a possible $5,000,000 exemption of her own. 

As a result, at her death with no appreciation, her taxable estate would be $1,000,000. With a present estate tax rate of 40%, the Executor of her estate would owe $400,000 of estate taxes to the U.S. Treasury nine months after her date of death. 

Prioritizing proper planning with your trusted financial advisors, this $400,000 check to the U.S. Government is completely avoidable.

What Estate Planning Techniques Can I Use to Protect Myself and My Family?

There are numerous estate planning techniques that professionals use to avoid the situation just described. One method that is not as popular as others happen to be very beneficial in this particular economy. A Grantor Retained Annuity Trust (GRAT) is getting a lot of attention now because of the low-interest rates, referred to as ‘Section 7520’ rates. 

In this particular annuity, the trust freezes the value of the assets while transferring any future appreciation to the next generation with little or no estate or gift taxes. In this case, the individual transfers assets into an irrevocable GRAT for the fixed term. Simultaneously, they retain the right to receive an annual income stream plus interest based on a government’s Section 7520 rate. The current rate happens to be 0.4% as of October 2020. At the end of the trust’s certain term, the assets are distributed to the trust’s beneficiaries, usually the grantor’s children. But here is the real advantage of a GRAT:

The actual value of the leftover assets in the irrevocable trust is a taxable gift upfront, but the low-interest rates used in the computation of value reduces the value of the transferred assets, which trims down the gift amount. If the assets inside the trust appreciate at a rate higher than the present 0.4% rate, the trust beneficiaries will receive the value of the additional growth tax-free when the trust expires.

At the End of The Day

The above GRAT is just one of the many estate planning tools that professionals use to reduce estate and gift taxes. In future articles, we will share other ideas for your consideration; regardless of whether the exemption stays at its present level of $11,580,000 per taxpayer or is reduced to its pre-2018 levels.

Holden Moss CPAs is dedicated to aiding businesses in this difficult time. We will provide you with all the tools and information necessary to succeed. If you have any questions please give us a call at (919) 556-6216. Contact us via email at admin@holdenmoss.com. We look forward to bettering your business.