Estate and gift taxes can worry about our clients—especially when the numbers change. The numbers for many of these taxes have changed for 2020, so a new-year review is wise.
You will see in the chart below that, while the amounts that are excluded from taxes keep going up, if you haven’t reviewed your estate planning documents, this can be a double-edged sword.
- The annual gift tax exclusion remains at $15,000 per beneficiary. If you give more than $15,000 to the same person, you have to report the gift to the IRS, but you don’t have to pay any tax until you pass the $11.58 million figure. Also, if you follow the IRS procedures, you can still make gifts to pay for others’ education and health-related costs without any limit.
- The federal figures are indexed to inflation, so they should increase over the years. However, the law setting the exemption amounts sunsets in 2025 and, if Congress doesn’t act, the amounts exempted from the tax will drop by more than half in 2026.
- Maryland also has a 10% inheritance tax, which is only assessed on amounts given to people outside your extended family. But this tax is subtracted from any Maryland estate tax that has to be paid.
What about that Double-Edged Sword?
Back when the federal tax exclusion was much lower, lawyers drafted wills with trusts designed to reduce the tax bite. Today, with much larger amounts being excluded, some of these trusts can backfire:
- They can result in your spouse receiving nothing while large amounts are held for future use by your children.
- They can result in the assessment of capital gains taxes at up to a 20 per cent rate, even if no estate taxes are owed.
A disclaimer trust could be used to address these issues. It allows a survivor nine months after the spouse dies in which to consult with advisors to determine what course is best. The disclaimer trust avoids the risk of being locked into the terms of an old trust, but still allows for maximum tax savings.
But, if you don’t review your estate planning documents, you won’t even know if you have a “bad” trust built into your will.
Time for a Look
We recommend all our clients review their estate planning documents every two to three years, or whenever there is a significant change in their circumstances or in the law.
If you already have estate documents in place, now is the time to find and review them. If you haven’t thought about estate planning at all, there’s no time like the present to start. You never know what life will throw at you, so it’s always best to ensure that your intentions are clear, documented, and carried out.
Finally, even if you have an estate that exceeds the federal or state tax exemptions, there are still many vehicles that can be employed to minimize or even eliminate your estate tax exposure. But you need to work with professionals. Case in point: We recently reduced the tax exposure of one client by millions – money that can now go to his children.