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3 Simple Steps to Avoid Estate Tax

Alex LaRosa, CFP®

Alex LaRosa, CFP®

Investment Advisor Representative

November 10, 2020

The Tax Cuts and Jobs Act (TCJA) of 2018 increased the lifetime estate tax exclusion from $5.45 Million to $11.5 million. The exclusion also doubles for married couple to an exclusion of $22.8 million. As you can imagine, this made the need for estate planning unnecessary for most people.

However, these exclusion limits may not be here forever. First, the TCJA has a sunset provision in which the current exclusion limits will revert to the 2017 limits if not extended. Second is the possibility of Joe Biden winning the upcoming election. As of right now his administration’s tax proposal does not address estate tax exclusion limits, but many are speculating they could be included along with increased taxes to higher income earners.

If you have concerns about how your estate could be taxed in the future, this blog is for you. We will cover a few simple steps that you can start taking today to help reduce the possibly of estate taxes due. These strategies can be accomplished without the need for trusts or expensive estate attorney fees.

  1. Gift Splitting

The current annual gift tax exclusion is $15,000 per person. That means you can give up to $15,000 per person every year without filling out a gift tax return or reducing your lifetime exclusion of $11.5 million. What many people do not know is they can double the annual gift exclusion to $30,000 if they are married by electing gift splitting. While this will require you to file form 709 each year it will not reduce your lifetime exclusion amount.

Gifting each year is a simple strategy to reduce the size of your estate therefore lowering the amount subject to tax.

  • Accelerated 529 Gifting

This strategy is like annual gifting on steroids. A person can gift up $15,000 ($30,000 if gift splitting is elected) to a 529 each year without reducing their lifetime exclusion. However, when gifting to 529 plans a person can accelerate their gifts up to 5 years. This means they can use 5 years of their annual exclusion all in one year for a total of $75,000 ($150,000 if gift splitting) per 529 plan.

So, let’s say a married couple has three beneficiaries and wishes to make contributions to their qualified education accounts. In one year, they can gift up to $450,000 ($150,000 per account) to their 529’s. Not only will this reduce the size of their estate, but it will allow the gift to grow tax free if used to pay for education.

  • Charitable Gifting

In addition to reducing your overall estate, gifting to charity will also give you favorable tax deductions in the year the gift is made. There are also no annual limits when it comes to charitable donations.

A person can gift more than just cash to a charity. Stocks, property, collectibles, and art are all assets that can be donated. While these gifts will all accomplish the goal of reducing your estate donating assets other than cash may provide additional tax benefits to you so be sure to consult with us and check with your tax preparer before deciding.

Two popular strategies are gifting appreciated stock and gifting your Required Minimum Distribution (RMD). Gifting appreciated stock is a popular strategy because it reduces your estate, provides a tax deduction, and avoids large capital gains. Gifting your RMD can help offset income taxes from unwanted but required distributions.

Each of these strategies can be accomplished without the help of an estate attorney. However, you should ensure that they fit into your overall financial plan. So, before moving forward make sure you reach out to both your advisor and tax preparer. If you would like help planning your estate, we can help, just give us a call at 610-825-3540.

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3 Simple Steps to Avoid Estate Tax

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