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Estate Planning During a Pandemic Presents Tax Savings Window

Boston Business Journal By Bernkopf Goodman on 07.16.2020
Posted In: In The News, Publications

This article was originally published on the Boston Business Journal’s website.  View the article here.

The current pandemic has caused death and created dire economic consequences — record unemployment, interest rates approaching zero percent, and pockets of significantly depressed asset values. However, this economic climate, combined with current estate and gift tax laws, presents a unique opportunity to lock in tax savings for those with significant assets. That window of opportunity may soon close. In addition, those who have a commitment to certain nonprofits and social causes have an opportunity to leverage current tax laws to maximize the impact of their donations at a time when nonprofits and social causes most need the assistance.

Estate tax exemption for 2020

In 2018, the federal estate tax exemption doubled to $10 million per person, which has been increased for inflation each year since then. For 2020, the exemption allows individuals to transfer up to $11.58 million by lifetime gift, transfer at death, or a combination of the two, without paying estate or gift taxes. For a married couple, the total is $23.16 million. This exemption is by far the most favorable in recent memory (in 2000, the exemption was a mere $675,000). In addition, the tax rate for an estate that exceeds the exemption amount is also historically low (a top rate of 40%).

Maximize higher estate tax exemption before it’s too late

The increased tax exemption, combined with current decreased asset values, allows individuals to freeze the value of assets in their estates now so that they can maximize the use of the higher estate tax exemption. Under the law’s current “use it or lose it” regime, the exemption amount in effect at death will control how much of an estate passes free of estate tax, unless a person makes lifetime transfers “locking in” the current exemption. Estate planning techniques may further allow individuals to maximize their use of the current exemption by discounting the value of certain family assets and taking advantage of historically low interest rates. Utilizing these strategies during a person’s life is typically far more advantageous than waiting until a person’s death, as one can often prevent the double taxation of paying “tax on tax” at death.

Favorable estate and gift tax laws could go away

The factors that make estate planning so valuable right now are not guaranteed to remain in place for long. Congress can change these rules at any time. The looming presidential election has refocused attention on whether such tax policies should remain in place, as they allow a substantial amount of wealth to be transferred free of estate or gift taxes each year. The current pandemic has delivered a one-two punch to the federal government: decreased economic activity, which has eroded tax revenue, and unprecedented and costly federal relief measures. The result is massive budget shortfalls that put even greater pressure on the government to find additional sources of revenue. The current exceptionally favorable estate and gift tax laws are easy targets.

One reason why individuals often do not take advantage of tax savings available through estate planning is that they do not want to give up control of their property. Real estate owners in particular often want to retain the ability to decide how their properties are operated and if and when the properties are ultimately sold. However, with wise counsel and other advisers, these concerns can be addressed and allow for lifetime gifting that locks in tax savings without ceding family control.

The current combination of decreased asset values, favorable tax laws, and estate planning tools now available present a unique opportunity for savvy individuals and sophisticated counsel to act before the opportunity disappears.

Eric Allon and Allen Hankins are real estate and business law partners at Bernkopf Goodman, and Jonathan Korb is general counsel and managing director for Loring, Wolcott & Coolidge, a multi-family office and wealth management firm.