OC Elder Law
Estate Planning Strategies With New Laws on the Horizon
In recent years, Republicans have been calling for a repeal of many aspects of the Federal estate tax system. Donald J. Trump’s election and the Republican sweep of both Houses of the Congress have made the possibility of sweeping estate tax reform very high over the coming two years. All eyes are now on potential legislation that could affect the estate and gift tax system in 2017. These factors bring to the fore the significance of being flexible as you do your estate planning and proceeding.
Here are several strategies that are worth looking into while waiting for potential Congress legislative action.
Under the existing law, charity gifts are deductible as “itemized deductions.” However, the new President wants to introduce more dramatic limits on such items. If you take your gifts to charity in 2017, you stand to benefit from a much larger tax break.Generally, you may also want to have your deductions accelerated into the current year. For the same reasons, you also ought to use the lifetime gift exemption of $5.49 million.
An installment sale made in favor of a grantor trust is a financial strategy that works best with real estate that is income-producing, family business interests, or other more liquid type of investments that have growth potential in the future. Because for income tax purposes the trust acts as a “grantor trust”, it doesn’t realize capital gains tax at the transfer time.
Family Limited Partnerships
In view of the legislative uncertainty, a family limited partnership (FLP) is still a viable strategy for tax minimization. A supplementary benefit of setting up or establishing a family limited partnership and getting it funded with assets is that it affords you the opportunity for getting discounts on any wealth transfers made to family members.
Under the existing taxation, a step-up in the cost of an asset gets granted when that person passes away. This means that the recipient family members can dispose the asset without incurring any form of capital gains tax. In case the US estate tax gets repealed, this benefit will most likely be eliminated. You may consider giving your appreciated real estate assets to a trust that has been specifically designed to allow such assets to be included as part of a less affluent estate that belongs to your parents.
Charitable Remainder Trusts (CRTS)
In setting up Charitable Reminder Trusts, the trust creator retains the right to receive a fixed percentage or annuity of the trust assets yearly. At the expiration of the CRT term or when the creator passes on, the CRT assets balance pass to chosen charitable organizations that can also include a private family foundation. As the CRT period beneficiaries are non-profit organizations, the sale of any assets is not subject to capital gains.
Given these unfolding dynamics on the political-legal front, the US real estate sector, similar to other critical areas like health care has a dark cloud of uncertainty that hovers over it. All of the above strategies need to be implemented with care. But one thing is clear, big change is coming and you should plan your real estate accordingly. Until all the intentions of the new administration become very clear, many taxpayers are opting to adopt a wait-and-see attitude in regard to estate tax planning over the next couple of months.