By Raymond C. Radigan
Year-end is always a special time. A time for resolutions and reflection—especially in a year as volatile and unprecedented as 2020.
The end of the year also provides a final opportunity to review and potentially optimize your estate and financial plans to ensure you are in the best possible position going into 2021. With the uncertainty and potential changes in tax policy, it is even more important to speak with your estate planning and/or tax adviser to get a head start. Consider the following issues when contemplating year-end planning:
Gifting
Personal gifts. Annual exclusion gifts are a common theme this time of year. In 2020 and 2021, taxpayers can generally give up to $15,000 ($30,000 if a married couple elects to split gifts) without paying a federal gift tax. Such annual exclusion gifts are routinely made outright (e.g. holiday gifts to children or grandchildren) or to help fund education by making contributions to the recipient’s 529 plan.
A common feature of an estate plan may also include a strategy to contribute annual exclusion gifts to an irrevocable trust for the benefit of family members.
Charitable gifting. Gifts to charity are generally tax deductible. Charitable gifts can be strategically timed to maximize income tax deductions—while also providing estate and gift tax benefits. Contributing to a donor advised fund or purchasing a charitable gift annuity may permit you to receive an immediate tax deduction but not actually distribute the funds to a charity until a later time. Certain trust structures—like charitable lead trusts (CLTs) or charitable remainder trusts (CRTs)—are great ways to benefit charities and family.
Also, if you are 72 years or older with a funded retirement account, you may be able to withdraw up to $100,000 and make a direct contribution to charity without any tax consequences.
Financial and estate plan review
Use of federal estate and gift tax exemption. The amount you can protect from federal estate and gift taxes in 2020 is $11.58 million. Furthermore, married couples can shelter $23.16 million from gift and estate tax liability by using the concept known as portability. In 2021, the exemption will be subject to a scheduled inflation increase of $11.7 million and $23.4 million for married couples, respectively.
Under current law, the exemption will basically be cut in half starting in 2026 but it could be reduced drastically before then depending on the presidential election results. Therefore, it is especially important for individuals with significant net worth over the exemption amount to consider a gifting strategy – whether outright or in trust—while the exemption is so high.
Review planning documents. Although it is recommended to review your estate planning documents every two to five years, it may be a good idea to do so earlier in such a violative year as 2020. Confer with your financial advisor or estate planning attorney to ensure that your plan remains in line with your goals and the ever-changing landscape of estate and tax law.
Take a look at investment portfolio. Review your portfolio holdings to determine unrealized capital gains and losses. Consider adjusting your portfolio in order to reduce or offset capital gains while pursuing your investment objectives and goals. Review your portfolio to understand how and when income is generated from your holdings. Incorporate your tax strategy into your investment portfolio and consider tax issues prior to making purchases or selling an asset.
Maximize retirement account benefits
Establish and/or contribute to a qualified retirement plan. Contributions to an employer-sponsored 401(k) or other qualified retirement plan are quite beneficial as such contributions are made with pre-tax dollars—meaning they are not taxed until distributed. Consider making the maximum contribution allowed in order to reduce taxable income and defer taxes until a future date when your tax rate may be lower.
Required minimum distributions. Starting in 2020, an individual must take out a minimum amount from their qualified retirement plan (e.g. 401k) or traditional individual retirement account (IRA) at age 72 or be subject to significant penalties. The Coronavirus Aid, Relief and Economic Security Act (the CARES Act), however, has suspended the requirement to take minimum distributions in 2020.
Therefore, be advised that no withdrawals should be made from a retirement account if the funds are not needed for support. Instead, the funds should remain in the retirement account and continue to grow on a tax deferred basis.
IRAs and HSAs. Funding IRAs and Health Savings Accounts (HSAs) can be a great way to maximize tax benefits and save for the future. For instance, HSAs can be quite beneficial as distributions from HSAs are not taxable when used to pay qualified medical expenses, including dental and vision. Additionally, profits accumulate tax-deferred and are tax free if used to pay qualified medical expenses.
Roth IRA conversion. Converting a traditional IRA to a Roth IRA can be advantageous but require analysis as each situation is unique. Untaxed amounts rolled over from a traditional IRA to a Roth IRA may be subject to income taxation.
After conversion, Roth IRAs have the potential of tax-free growth and tax-free withdrawals in retirement. Timing is important as the Roth IRA conversion deadline for 2020 is December 31st.
Radigan is responsible for managing the trust activity across the TD Bank footprint from Maine to Florida.
