Estate and gift tax-planning

2020 has been an interesting year for many reasons. As we approach year-end, we recommend doing a number of things from an estate and gift tax-planning standpoint. Those ideas are discussed below. However, with 2020 being a presidential election year, a significant planning opportunity might exist this year that otherwise may not occur again.


For 2020, the estate, gift and generation-skipping-tax exemption is set at $11.58 million per person and is scheduled to increase each year by a cost-of-living factor. However, that level of exemption is due to sunset after 2025, when it would return to half that amount. The $5 million level of exemption (adjusted annually by a cost-of-living adjustment or COLA) came into the law in 2011. Prior to then, the exemption level had reached $3.5 million.

The estate tax law also allows an adjustment in basis to the date of death fair market value when one passes away. We normally think of this as a step-up in basis, since, most of the time, assets have increased in value from the time of purchase. This has been the law for many years.

In this presidential election year, Democratic presidential nominee Joe Biden proposes, among other things, to “return the exemption levels to historic norms” and “eliminate the step-up in basis for inherited assets.” Whether historic exemption levels mean the $5 million level referred to above or the pre-2011 $3.5 million level is unclear.

Of course, the changes that Biden proposes would be possible only if he wins the presidency, and the Democrats take the Senate and retain majority in the House. In January 2021, new legislation could be introduced to effect these changes. New law could possibly be effective retroactively to Jan. 1, 2020.

The next few months may be the last time individuals will have an exemption of $11.58 million. If it is used to shelter gifts in 2020, the use would likely be grandfathered even if the exemption level is reduced in the future. In this scenario, the use is the “excess” of the current level over what it might be reduced to, to be considered “used.” For example, gifts of $9 million in 2020 will use $4 of the “excess” over the $5 million level if the law is changed to reduce the exemption to $5 million. If gifts of only $5 million are made in 2020 and the exemption level is reduced to $5 million, the opportunity to use the “excess” will have been lost.

Use the “excess” exemption the current law provides

Clients with the wealth to take advantage of this historically high exemption level have many ways to make gifts in 2020. While this article will not be able to discuss all the options in detail, there are ways to make gifts that are straightforward. Of course, there are also more complicated techniques requiring time and planning — and time is quickly running out to do so before year-end. The following strategies should be discussed with your estate planning advisors.

  • Gifts of business interests in S corporations, partnerships or limited liability companies (LLCs) could take advantage of discounts when transferring minority interests in nonvoting stock, limited partnership interests or LLC membership interests. Use of discounts allows more value to be included in the gift.
    – This shifting of business ownership might already be part of succession planning for your business and now could be a good time to make this type of transfer.
  • For those clients apprehensive about giving up the cash flow from assets gifted away, there are various techniques to address this, such as the spousal limited access trust (SLAT). The SLAT is an irrevocable trust which has the benefit of removing assets via gift from the estate, but allowing the spouse and other beneficiaries to have access to the assets and their income.
    – The SLAT features of the trust can then be combined with longer trust terms, so the trust assets can benefit multiple generations. Finally, those trusts can be created as “grantor” trusts so the trust creator/settlor continues to pay the income taxes on the income generated by the trust assets. This allows the trust assets to grow, without the need to pay taxes, and the settlor’s taxable estate to be reduced further.
    – With a grantor SLAT, gifts can be made to the trust and assets can be sold to the trust, without recognition of gain on the sale. The sale is usually accomplished by the SLAT issuing a promissory note to the seller.
    – If the transfer is via a sale right now, that promissory note could be forgiven by Dec. 31, 2020, if there is a change in Washington that might threaten the exemption level. If the president is re-elected, the decision of what to do with the promissory note could be delayed until 2025.
  • Gifts by one spouse to a lifetime trust for the benefit of the other spouse is another planning option. However, this does not remove the assets from both spouses’ taxable estates like the SLAT does.
  • Gifts to trusts for the benefit of the settlor’s children and future generations — not benefitting the settlor’s spouse. This trust could be generation skipping and could also be taxed to the grantor.
  • Gifts to any of these types of trusts do not have to be with business assets. The gifts could be of investment assets, cash or any other type of transferable asset. Unfortunately, IRAs, annuities and other like assets cannot be transferred by gift during one’s lifetime.
  • Gifts into trusts for the benefit of the trust beneficiaries also provides asset protection for those beneficiaries and that should not be overlooked.

Finally, taxpayers who have already engaged in significant transfer planning in recent years (in response to earlier tax law changes) may have significant promissory notes still outstanding from earlier sales to grantor trusts. Those promissory notes, or some portion of them, can be forgiven by Dec. 31, 2020, to use the excess exemption.

Other estate-planning moves that should be considered before year-end

  • Annual exclusion gifts: the limit for 2020 is $15,000
  • Medical bills of family members: pay directly to the medical provider, not to your family member for their use in paying their bill
  • Tuition of a child or grandchild: pay directly to the educational institution
  • Grantor retained annuity trust (GRAT): fund with an asset with a value that has been depressed by the current situation, but which has the potential to return to historic values; GRATs work well when the transferred assets grow at a rate greater than the current section 7520 rate (0.4% in October)
  • Depressed value assets: make an outright gift to your children
  • Personally owned life insurance policies: transfer into irrevocable trusts to remove the value of the policy from the taxable estate
  • Higher interest rate notes: refinance those notes that have been created from prior transactions; current AFR rates for October 2020 are 0.14% for the short term (three years or less); 0.38% for midterm (four to nine years); and 1.12% for long term (more than nine years)
  • Intrafamily loans: consider making new loans or refinancing existing loans to take advantage of the low AFR rates; this is not a transfer technique, but it is designed to slow the growth of assets in your estate if you loan money and take back a note with these low interest rates

Comparing the current income tax rates to estate and gift tax rates, the income tax basis of the assets used to make gifts is now more important than before. Gifting higher basis assets is more beneficial than lower basis assets because of the current step-up in basis that can occur on death with lower basis assets included in the estate. Basis needs to be considered in any gift strategy. However, transactions with grantor trusts may continue to give the donor flexibility to address this issue. In addition, if business assets are used in a succession planning situation, consider whether that asset will be sold in future generations when discussing the impact of basis. Finally, the possible elimination of the step-up in basis rules would change our thinking again on all transfers. Please consult your estate tax advisor before deciding which assets to gift.

Finally, there are states with their own estate tax regimes and those states usually do not have the same federal exemption level of $11.58 million. Only one state has a gift tax for lifetime gifts. Planning needs to also factor in the impact of lifetime giving in excess of those state exemptions. As long as the state does not require you to include those prior gifts in the state’s taxable estate calculation, you can move more asset value to heirs during lifetime with gifts than if you wait until death to transfer those assets. Again, consult your estate tax advisor.

For more information on this topic, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Students returning to campus after COVID-19 closures social distancing at times
Next up

Back to campus: higher education concerns, risks and opportunities