The Good, Bad and Ugly of Estate Tax Planning

My guess is that only about 25,000 estate tax returns would be filed for those dying in 2020 and who left estates large enough to pay estate tax. So for most people, this is not a concern. However, for those with sufficient assets, this is a very serious matter.

Adding to the seriousness is that it is unknown how the Senate will be made up in 2021 and it is a possibility that the gift and estate tax exemption of $11,580,000 for 2020 could be reduced next year. No one knows what will happen and history has shown us that some off the wall legislation is not an impossibility. However here are some planning moves that can be considered.

The Good

The good part is that gifts can be made in excess of the $15,000 per donee annual exclusion amount up to $11,580,000 per taxpayer transfer-tax-free. These amounts are doubled with a consenting spouse. So these transfers can be considered to reduce potential estate tax but any transfers must be made by December 31, 2020.

The Bad

Making gifts requires giving away assets and control. Do you really want to give away some of what you have? If you are mega-wealthy, it might not matter. However, if there is a possibility that you might need the funds, or might not be happy without control over the assets you gave away, then that would be pretty bad. Do not let taxes drive your actions.

The Ugly

An effective estate tax reduction strategy is to make gifts of noncontrolling interests in businesses or investment property. I posted about this on October 12, 2020. The ugly part is that your heirs acquire the property received as a gift taking over the donor’s basis. This means that all gains will be fully taxed upon a sale. Presently there is a nice gap between the estate tax and capital gains rates. But, who knows what the future rates will be? Of course a big advantage of gifts, besides the potential for valuation discounts is that all future cash flow and growth in value will escape estate tax when the donor eventually passes on.

Conclusion

If you are in the situation where it appears likely your estate would be subject to estate tax, now, i.e. before December 31, 2020, might be a good time to relook at your estate plan.