If you’re thinking to yourself, “I’ve already created an estate plan, so I’m good” and you’re about to tune out the rest of this article, hang on. Creating the estate plan is one thing. Maintaining it is another.
As changes in leadership and laws occur, it’s important to stay on top of how these can affect you and your business, and let’s be clear – these changes can be major.
Leadership & Tax Laws
In January, after the Georgia runoff, a New York Times’ article stated:
“With Democrats controlling the legislative and executive branches, there is concern that the estate tax exemption level could drop to $5 million or even $3.5 million, where it was when President Barack Obama took office. (The current level, which was set in the 2017 tax overhaul, is expected to sunset in 2025.) For the wealthiest in the country, the bigger concern is the rate itself. It’s now at 40 percent, but it was as high as 55 percent in 2001.
Possible changes to the exemption rate have weighed on wealthy Americans, who face a choice of whether to use the tax benefit now to make a large gift before any changes can become law or wait to see how the year plays out.”
For clarification, the exemption amount may be used during lifetime as gifts and/or at death. We know the exemption amount now, but we don’t know what it may be in the near future – very likely, much lower.
Making Use of Gifts Now
In talking about estate planning with a client recently, he said to me, “So you’re telling me I have to pay 40% in income taxes whenever my business makes a profit, then another 40% (over the exemption amount referenced above) in estate taxes when I die, and the remainder is passed on?”
Unfortunately, my answer to this was, “Yes, sir.”
He is majority owner of a successful and growing construction company. Its balance sheet is already well capitalized, so almost all the annual profits are distributed each year. These facts make shares of the business a great example of the type of asset to consider gifting.
After considering a few options, my client chose to set up a Spousal Lifetime Access Trust (SLAT). As the name implies, a SLAT is an irrevocable trust to which one spouse makes a gift to benefit the other spouse while removing the assets from their combined estates. A SLAT allows for future flexibility because the beneficiary spouse may request distributions, if needed, during their lifetime.
Working closely with his tax attorney and CPA, he elected to transfer 20% of his company stock to the SLAT. This didn’t fully use up his estate tax exemption, but he was comfortable with that amount.
The real beauty for him is that annual shareholder distributions have been greater than $1 million. Thus, in addition to removing 20% of the value of the stock from his estate, each year more than $200,000 will be transferred out of his estate, as well.
Creating a strategy that’s specific to your needs takes time and a team of professionals. This client was very focused on the project, and it still took about four months to complete. But the bottom line is that he’s extremely pleased with how things turned out.
If this article has prompted you to take action, but you don’t know where to start, let’s talk about it. Creating an estate plan that balances taxes with personal needs takes a team of experts, to ensure everything is done effectively and with flexibility.
I know that you don’t have the time to keep up with all the tax laws and changes that might affect your estate – and that’s okay! That’s what I’m here for. We’ll implement a plan that works for you now and gives you the foundation you need. After that, I’ll keep you updated on any changes that might need to be made so you know your family and your business are protected.
In the meantime, I invite you to take a look at this Reaching your unique goals with trust planning strategies. As always, please let me know if you have any questions.
Lincoln Financial Securities and its representatives do not offer tax or legal advice. Individuals should consult their tax or legal professionals regarding their specific circumstances. LFS-3516010-033121