One of the chief benefits of the Tax Cuts and Jobs Act (TCJA) of 2017 is the reduced likelihood of federal estate taxes for many taxpayers. However, there remains a need for financial professionals to understand a number of issues that can have a significant impact on the transfer of property.
This article will highlight five key issues and potential strategies that may help reduce your clients’ tax burden.
Before we jump into the specifics, it’s important to understand the current federal estate tax.
First — for 2019 there is an $11.4 million federal estate tax exemption amount for each individual — almost double what it had been previously. Before recognizing there is an unlimited marital exclusion, for a married couple, this means that one spouse’s estate can set aside $11.4 million before estate tax exposure and the other spouse’s estate can exclude $11.4 million before it is exposed to federal estate tax. This figure is assuming no taxable gifts reduced the exempted amount.
Second — “portability” for surviving spouses is now permanent. This means that if one spouse (Spouse A for example) dies first and has a $22.8 million estate and leaves it outright to Spouse B – Spouse B will inherit the unused exemption from Spouse A in addition to his/her own (assuming Form 706 is filed with Spouse A’s estate tax filing). By doing this, and assuming the exempted amount stays the same, $22.8 million can be left by the second spouse without exposure to federal estate tax.
Third — the estate and gift tax structure is unified. This means that each person can pass on to their heirs up to $11.4 million at death — without estate tax, or they can gift it to anyone while they are alive — without a gift tax. Taxable gifts, which in 2019 is any amount over $15,000 by any individual to any single individual, reduce the estate tax exemption available at death.
Probate
Probate is the legal process that completes a person’s legal and financial affairs after their death. During the probate process, a person’s property is identified, cataloged, and appraised. In addition, probate makes certain any outstanding debts and taxes are paid. It can be a complex process filled with very specific legal requirements. There are several issues that should be considered when managing probate, some of which can be mitigated by incorporating an annuity into your client’s portfolio:
1. Public Exposure — Probate takes place in a public court. That means everything is a matter of public record — there is no privacy. Anyone who wants to can find out exactly what was left behind (and how much each of a deceased person’s heirs received) and can review the court records for the deceased person’s estate. An annuity is one strategy that can help solve for this issue since annuity benefits pass to the beneficiary via beneficiary designation and typically avoids probate (assuming the estate is not the named beneficiary of the annuity).
2. Costs – Probate can be expensive. Even though probate costs are capped in some states, they may reach 5 percent or more of the estate’s value. That’s calculated on the gross value of the estate — before taxes, debts, and other expenses are paid. And if the probate process is challenged, the legal costs can rise. Annuity death benefits avoid the probate process when an individual is the beneficiary of the contract. Although the annuity value is still included in the total estate, this bypass may help reduce the cost of probate.