Estate Planning Considerations for the year 2020

By: Mary Anne Cody

The start of a new year is always a good time to step back and consider estate planning.  A carefully thought out plan is a wonderful legacy for your family. With the turmoil that now exists in our nation’s capital and the national elections which will take place next year, we should carefully consider what to take for estate planning for the year 2020.  Some national candidates are proposing significant changes to the current estate and gift tax system.  As we do not know what will happen next year the best thing that we can do is consider what actions are appropriate to take now.

Where are we today?

For a simplified review of the estate and gift tax that is in place now the following items should be noted:

  1. Annual gifts of $15,000 per person to an unlimited number of people can be made without incurring any federal gift tax or utilizing an individual’s lifetime exclusion amount. Annual gifts that may be made to a noncitizen spouse is capped at $157,000 in 2020.
  2. The Federal exemption amount for estate and gift tax purposes, that amount that an individual either during lifetime or at death can pass to heirs without incurring federal estate tax, is $11,580,000 in 2020. Note that this exemption amount is scheduled to go down to $5,000,000 after December 31, 2025.  In certain circumstances spouses may share (or inherit) the Federal exemption amount.
  3. New York State does not have a gift tax. But note New York State does require that an estate add back taxable gifts that are made within three years of death for the determination of New York taxable estate.
  4. The New York State estate tax exemption amount is $5,850,000 in 2020. This exclusion amount is not shared (portable) between spouses.

For example, assume husband and wife have $6.5 million in assets and they have simple Wills leaving all assets to spouse (and then children if spouse predeceases). There will be no estate tax due at the death of the first spouse because of the unlimited marital deduction.  At the death of the second spouse there is now a New York taxable estate, with an approximate rate of 16%. And the benefit of the New York exemption amount goes away if an estate exceeds the exemption amount by more than 5% (New York “cliff”).  This result can be avoided with proper planning.

Easy action items to be taken:

  • Annual gifts should be considered if the goal is to reduce your taxable estate.
  • Estate plans should be reviewed to confirm the alignment with the current Federal and New York State exemption amounts.
  • Maximize IRA and other compensation deferral opportunities.
  • Maximize the income tax deductions available to charitable giving; such as thru a qualified charitable deduction with retirement plan assets.

Further considerations for 2020:

  • As the Treasury has finalized regulations confirming there will be no penalty to estates if there has been a utilization of exemption during lifetime that exceeds the statutory exemption at death.  In other words, a person can utilize their entire exemption amount now, and if they pass away for example in 2026 when the exemption amount is reduced to $5 million, the estate has no penalty.  Individuals should consider whether it is appropriate to make lifetime gifts in 2020 before any 2021 changes by a new administration or even the 2025 sunset provision.  Note a cost of life time giving is that the basis for recipients is equal to the donor’s basis, the step up to fair market value is only for inherited assets received on account of death.
  • In addition; trusts should be reviewed to see if any changes to the trusts make sense in light of your current family situation and the estate law in place.
  • There are many estate planning tools which can be effectively utilized to reduce taxable estates such as the grantor retained annuity trusts (GRATs), and the qualified personal residence trusts (QPRTs).
  • Estate planning documents and beneficiary designations should be reviewed in light of any recent changes in your family, such as marriage, divorce, birth of children or grandchildren.