2020 has been a year full of unprecedented circumstances. Legislation and a federal election have resulted in significant changes for existing estate plans and created unique planning opportunities.
The SECURE Act
The SECURE Act became effective in January 2020. The SECURE Act overhauled the distribution rules for qualified plans after the account owner’s death. Previously, qualified plans could be stretched out over the life expectancy of a beneficiary. Estate plans were structured to take advantage of that stretch. Under the SECURE Act, many beneficiaries are now subject to a maximum ten (10)-year payout requirement after the death of the account owner. This can create unintended income tax consequences. Individuals should review beneficiary designations and their testamentary documents to ensure such designations are still consistent with their intent.
Federal Estate and Gift Tax Exclusion
The current federal estate and gift tax exclusion is $11.58 million (or $23.16 million for a married couple). This is the amount that can be transferred during lifetime (by gift) or at death before a 40% transfer tax is imposed. The exclusion amount will drop to $5 million on January 1, 2026, as indexed for inflation. The Internal Revenue Service (IRS) has issued regulations confirming that gifts made prior to the 2026 reduction in exclusion will not be “clawed back” into the gross estate for estate tax purposes. For example, if an unmarried individual makes a gift of $11 million in 2020, and in the year of their death the estate tax exemption is $5 million, that individual’s estate will not owe tax on the excess $6 million that was gifted when the exemption amount was higher.
The outcome of the recent federal election creates the possibility of the federal estate and gift tax exclusion amount being reduced prior to January 1, 2026. The IRS anti-clawback regulations provide unique planning opportunities to lock in the current increased exclusion through the use of lifetime gifts, prior to any law change. Such planning opportunities allow individuals to (i) lock in the current exclusion amount, (ii) remove assets and future growth from their taxable estate, and (iii) continue to allow lifetime access to gifted assets.
In an uncertain environment with historically low interest rates, individuals should consider lifetime gifting techniques such as spousal limited access trusts (SLATs), grantor retained annuity trusts (GRATs), qualified personal residence trusts (QPRTs), and others.
If you would like to discuss the above options and changes in further detail, or you would simply like to review your estate plan in light of this unprecedented year, please reach out to Leech Tishman’s Estates & Trusts Practice Group.
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