Time to Plan for Year-End Gifts

Stoel Rives LLP
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Stoel Rives LLP

The upcoming November election could bring significant changes in tax laws impacting estate and wealth-transfer planning for our clients. Don’t wait until after the election to consider making important decisions—by that time, it might be too late to accomplish your tax goals. Acting soon allows for careful strategy to guide your actions to maximize the use of exemptions and reduce the aggregate expected tax burden for your family.

Gift Planning
While no one can predict the outcome of the election or changes in tax law that might occur, there are compelling reasons to consider accelerating your estate plan through 2020 lifetime gifts: (1) the federal gift tax exemption this year is $11.58 million, effectively double that for a married couple ($23.16 million), (2) none of Idaho, Oregon, or Washington imposes a gift tax at the state level, (3) if there is a change in the law next year, it could be made retroactive to January 1, 2021, and (4) the IRS has provided guidance that it will not seek to “claw back” gifts sheltered with higher exemptions if the exemption decreases in the future. We addressed in recent alerts the benefit of making gifts to use the current high gift exemption before any possible change in the law (see here). If you are interested in using your gift tax exemption this year, we encourage you to contact us now. We expect that many clients will want to make estate planning transfers before year-end if there is a change in the administration or congressional control, and given the anticipated volume of work, clients who wait to see the election results may find limited planning options remaining in the narrow time window to establish trusts, make transfers, and obtain valuations.

GRATs and IDGTs
The IRS issues a deemed interest rate for intra-family transactions, and it is now at a historic low. For gifts in September and October the IRS has assumed an unprecedented 0.4 percent rate of interest for these transactions, which may include family loans, grantor-retained annuity trusts (“GRATs”), sales to grantor trusts (“IDGTs”), and other similar methods to shift wealth to future generations.

Recap of Exemptions and Exclusions
Between now and the end of the year is a particularly good time to make annual or exemption-using gifts. As has been the case for some time, each individual can make gifts to any number of persons if the amount of each gift (per donor, per recipient) is $15,000 or less. These annual exclusion gifts can be doubled for married couples who make gifts with joint or community assets or who split gifts. Individuals who pay another person’s educational and medical expenses, as long as they are paid directly to the provider of those services, can exclude an additional unlimited amount from their gift tax calculation. For example, a client who pays her niece’s graduate school tuition directly to the university, pays some medical bills for her directly to the hospital, and writes her a check for up to $15,000 at the end of the year, will have used none of her lifetime gift exemption and will not have to file a gift tax return, if those were her only gifts in 2020. In the aggregate and over time, maximizing such excluded gifts can be a powerful wealth transfer tool.

Making larger gifts that use up the lifetime federal gift and estate tax exemption, as described above and in our recent alerts, is advisable even without uncertainty in federal estate and gift tax law because (1) the federal exemptions are at an unprecedented high amount, which may change next year, (2) for Washington and Oregon residents, gifts escape those states’ estate tax on the gifted assets (both states have low exemption amounts of $2.193 million and $1 million, respectively), (3) discount planning for gifts of interests in LLCs and other business entities, including those that own investment real estate, continues to be permitted allowing additional opportunities for tax-free wealth transfer, and (4) certain gifts that rely on low interest rates are particularly attractive right now (see here). Married couples who are reluctant to part with all control or may have future needs to use of gifted assets may wish to consider a Spousal Limited Access Trust, as discussed in a recent alert.

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