2020 is quickly coming to an end. While most of us are eagerly awaiting the new year and hoping 2021 is much brighter than 2020, there are some estate planning and gifting considerations to review before year-end.
For 2020, you may gift up to $15,000 to anyone without using your lifetime gift tax exclusion or needing to file a gift tax return. The $15,000 limit is per person, per recipient.[i] Therefore, a married couple with a married child can gift up to $60,000 to their child and the child’s spouse in 2020–each parent gifts the child and the child’s spouse $15,000 each. In addition, they can gift an unlimited amount for direct payments for tuition and medical expenses. If you think you may have a taxable estate in the future or want to share your wealth with your loved ones while you are still living, gifting up to the annual exclusion amount is a great way to do this.
Review your current estate plan
First, do you have estate planning documents in place? If not, please ask us for a referral to an attorney to help you with this. If you do have documents, when were they last reviewed? Plans should be reviewed at least every 5 years or when there has been a life event (marriage, divorce, birth, death). Even if nothing has changed in your life, new legislation may change how your estate planning should be set up. For instance, the SECURE Act, which was passed at the end of 2019, made changes to how IRA beneficiaries need to take distributions when they inherit an account. As a result, if you have a trust as the beneficiary of your IRA, you should have the trust reviewed to make sure the language in the trust accomplishes your goals while also not having adverse tax consequences.[ii]
It is also a good idea to check the titling of all of your assets. You and your attorney may have spent a lot of time drafting a trust to fit your needs and goals, but if your accounts are not titled in the name of the trust, that all goes out the window.
Review Beneficiary Designations
In addition to your estate planning documents, you should review beneficiary designations on all of your investment accounts and insurance policies. Beneficiary designations take precedence over what is in your will or trust, so it is important to make sure these are up to date and coordinated with your estate planning documents. We recommend that everyone have either multiple primary beneficiaries or a primary and a contingent beneficiary(ies). You worked hard to save this money, and you want to make sure you can control where it ultimately goes at your passing.
You should also review which accounts are left to which beneficiary. Taxable accounts, IRAs, and Roth IRAs have different tax and distribution rules for beneficiaries. If you want to leave money to a charity, it is usually best to have it as a beneficiary on an IRA (the charity will not have to pay income tax on that amount, where an individual would). If one of your children is in a much higher tax bracket than another child, he/she may benefit more from receiving Roth or taxable accounts over inheriting an IRA account.
This is the first of five articles we will be posting on year-end financial planning topics. Keep a lookout over the next two months for additional articles on charitable contribution strategies, Lifetime Exclusion, Roth conversions, and reducing taxable income.
[i] “Frequently Asked Questions On Gift Taxes | Internal Revenue Service”. Irs.Gov, 2020, https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes#:~:text=The%20annual%20exclusion%20for%202014,the%20annual%20exclusion%20is%20%2415%2C000. Accessed 11 Nov 2020.
[ii] “SECURE Act Impacts Decision To Name Trust As Beneficiary Of Retirement Plan | Lexology”. Lexology.Com, 2020, https://www.lexology.com/library/detail.aspx?g=87463727-c335-42b9-ba26-fdc19c27b9f6. Accessed 11 Nov 2020.
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