Estate Planning Today for the World You Want Tomorrow

Often, when I begin a discussion with a client on estate planning, I remind them that they generally have three beneficiaries: family, charity, and Uncle Sam. I follow up with the question, “how much do you want to leave to each?” 

No one ever wants to leave their money to Uncle Sam, but the government will receive a piece of most everyone’s estate none-the-less — whether it be at the federal or state level, so you might consider incorporating philanthropy or bequests into your estate plan. With a deliberate, structured approach, you can leave specific assets to your kids and significant sums to charity, while paying zero estate taxes.

For those with large estates, you can currently leave up to $11.58 million to your children without a federal estate tax ($23 million+ between a couple). If your assets are greater than $22 million, the federal estate taxes can reach as high as 40%. Please note that the current exclusion of that magnitude sunsets at the end of 2025 and reverts back to $5 million per person (plus inflation).  Additionally, in many states there are significant state taxes to contend with. In Massachusetts, the first $1 million is estate tax free, but taxes on amounts over that can go as high as 16%. 

Therefore, in a low interest environment like today, and when valuations of assets including businesses, real estate, or stocks may currently be undervalued, it could be the perfect time to employ gifting techniques to efficiently move assets down a generation or two. Grantor Retained Annuity Trusts (GRATs), and installment sales are two common techniques that can be used to move assets to family members by keeping growth out of your estate or at a discounted rate.

Though the market has rebounded back to higher levels, we are likely to see another drop by the end of the year. When market values are depressed, it is a good time to consider transferring them into vehicles, like GRATs, that freeze the value and removes the future growth from your estate. Setting up limited partnerships that include the next generation allow assets to be moved out of the estate at a discount. Installment sales allow others to purchase your assets from your estate at low interest rates today. In addition, if your business is being negatively impacted by the COVID-19 pandemic, but you believe it will make a comeback, it may be a good time to get it appraised for gifting shares to family members at the lower current appraisal. 

Some clients ask, how much is enough to pass on to my kids? As parents, we don’t want our children to have too much given to them to ensure that they understand the value of hard work and money in life. With proper estate planning, you can choose a fixed amount that your beneficiaries will inherit and leave the rest to charity. When leaving assets to charities, you can avoid estate taxes both federally and at the state level. For instance, you could decide that your children will inherit $5 million apiece and designate the remainder of the estate to specific charities or to a Donor Advised Fund (DAF). You could also designate your kids as custodians of the DAF, so they can have a say as to where charitable donations will be directed into the future, thereby helping to instill and maintain a philanthropic attitude in their lives.

If you have questions or needs around your estate planning, we are here to help structure a plan that meets your specific goals.

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