While death is a certainty, some taxes aren’t when IRAs are used to make charitable bequests, explains a thought-provoking article titled “Win an Income-Tax Trifecta With Charitable Donations” from The Wall Street Journal. For those who are philanthropically minded and tax-savvy, this is an idea worth considering.

There are few better ways to leave funds to a charity than through traditional IRAs. The strategy is especially noteworthy now, given the growth in traditional IRA values over the last decade, even with the recent selloffs in bond and stock markets. At the end of 2022’s first quarter, traditional IRAs held about $11 trillion, more than double the $5 trillion in IRAs at the end of 2012.

With the demise of defined benefit pensions, traditional IRAs are now the largest financial account many people own, especially boomers. Therefore, it’s wise to know about applicable tax strategies.

The first advantage is tax efficiency. Donors of IRA assets at death win a three-way tax prize: no tax on the contributions going to the charity, no tax on annual growth and no tax on assets at death.

Compare this to donations of cash or investments, such as a stock held in a taxable account. For example, let’s say Jules wants to leave a total of $20,000 to several charities upon her death. She expects to have more than $20,000 in each of three accounts at this time. One account is cash, the other is a traditional IRA, holding stocks and funds, and the third is a taxable investment account holding stocks purchased decades ago.

A charitable bequest of assets from any of these three accounts will bring a federal estate-tax deduction. However, Jules’ estate will be smaller than the current estate tax exemption of about $12 million, so there are no federal estate taxes to consider.

Jules should focus on minimizing heirs’ income taxes on any assets she’s leaving them and donating traditional IRA assets is the way to go. If she leaves the IRA assets to heirs, they will have to empty the IRA within ten years and withdrawals will be taxable.

Giving IRA assets gets pretax dollars directly to the charities, which don’t pay taxes on the donation. A cash donation would be after tax dollars.

Donating the IRA assets to charity is also typically better than giving stock held in a taxable account. Because of the step-up provision, there is no capital gains on such investment assets held at death. If Jules bought the now $20,000 stock for $5,000, the step-up could save heirs capital gains tax on $15,000 when they sell the shares. If she donates the stock, heirs won’t get this valuable benefit.

Next, IRA donations allow for great flexibility. Circumstances in life change, so a will that is drawn up years before death could be changed over time, to give a bequest of a different size or to a different charity. It’s easier to make these changes with an IRA. One way is to set up a dedicated IRA naming one or more charities as beneficiaries and then moving assets from other IRAs into it via direct (and tax-free) transfers. Beneficiaries and the percentages can be easily changed, and the IRA owner can raise or lower the donation by transferring assets between IRAs.

If the IRA owner is 72 or older and has to take required minimum distributions, the owner can take out donations from different IRAs. Note the funds must go directly to the charity when making the donation.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “Can I Use an IRA to Reduce Estate Taxes?” read also these additional articles: Do I Need a Prenup? and Can a 529 Plan Help with Estate Planning? and Can You Prevent Family Fights over Inheritance? and Top Five Estate Planning Mistakes

Reference: The Wall Street Journal (Sep. 2, 2022) “Win an Income-Tax Trifecta With Charitable Donations”

People usually make gifts for three reasons—because they enjoy giving gifts, because they want to protect assets, or minimize tax liability. However, gifting in one’s elder years can have expensive and unintended consequences, as reported in the article “IRS standards for gifting differ from Medicaid” from The News-Enterprise.

The IRS gift tax becomes expensive, if gifts are large. However, each individual has a lifetime gift exemption and, as of this writing, it is $12.06 million, which is historically high. A married couple may make a gift of $24.12 million. Most people don’t get anywhere near these levels. Those who do are advised to do estate and tax planning to protect their assets.

The current lifetime gift tax exemption is scheduled to drop to $5.49 million per person after 2025, unless Congress extends the higher exemption, which seems unlikely.

The IRS also allows an annual exemption. For 2022, the annual exemption is $16,000 per person. Anyone can gift up to $16,000 per person and to multiple people, without reducing their lifetime exemption.

People often confuse the IRS annual exclusion with Medicaid requirements for eligibility. IRS gift tax rules are totally different from Medicaid rules.

Medicaid does not offer an annual gift exclusion. Medicaid penalizes any gift made within 60 months before applying to Medicaid, unless there has been a specific exception.

For Medicaid purposes, gifts include outright gifts to individuals, selling property for less than fair market value, transferring assets to a trust, or giving away partial interests.

The Veterans Administration may also penalize gifts made within 36 months before applying for certain VA programs based on eligibility.

Gifting can have serious capital gains tax consequences. Gifts of real estate property to another person are given with the giver’s tax basis. When real property is inherited, the property is received with a new basis of fair market value.

For gifting high value assets, the difference in tax basis can lead to either a big tax bill or big tax savings. Let’s say someone paid $50,000 for land 40 years ago, and today the land is worth $650,000. The appreciation of the property is $600,000. If the property is gifted while the owner is alive, the recipient has a $50,000 tax basis. When the recipient sells the property, they will have to pay a capital gains tax based on the difference.  In other words, the recipient will have $600,000 of taxable capital gain income, something that could have easily been avoided with proper tax planning.

If the property was inherited, or held in a certain way to obtain the “step up” in tax basis, the tax would be either nothing or next to nothing.

You can have your cake and eat it too. A good estate, tax, and asset protection plan is available if you seek out a competent Board Certified Estate Planning and Administration Specialist and Board Certified Tax Law Specialsit.  Medicaid planning is complicated and requires the experience and knowledge of an elder law attorney. What worked for your neighbor may not work for you, as we don’t always know all the details of someone else’s situation.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “Will Making a Gift Conflict with Medicaid?” read also these additional articles: Does a Beneficiary have to Pay Taxes on 401(k)? and The Risks of Creating Your Own Estate Plan and Is A Medicaid Planner Right for Me? and Alert: Scam Targeting Medicare Recipients

Reference: The News-Enterprise (Aug. 6, 2022) “IRS standards for gifting differ from Medicaid”

There are countless horror stories about grandchildren in tears, as they watch family farmland auctioned off because their grandparents had to liquidate assets to satisfy the taxes.

Another tale is siblings who were once in business together and now don’t talk to each other after one felt slighted because they didn’t receive the family’s antique tractor.

Ag Web’s recent article entitled “Who Gets What? Take This Important Estate Planning Step” says that no matter where you are in the process, you can always take another step.

First, decide what you’re going to do with your assets. Each farmer operating today needs to be considering what happens, if he or she passes away tonight. Think about what would happen to your spouse or your children, and who will manage the operation.

The asset part is important because you can assign heirs to each or a plan to sell them. From a management perspective, farmers should then reflect on the wishes of your potential heirs.

Children who grew up on the farm will no longer have an interest in it. That’s because they’re successful in business in the city or they just don’t have an interest or the management ability to continue the operation.

Second, assets if your estate will owe federal estate taxes.  Right now, the federal estate tax exemption sits at $12.06 million per person.  That means a couple can bequeath or give $24.12 million without estate tax consequences.  However, on January 1, 2026, in just under 3.5 years, the federal estate tax exemption reverts to one-half of the amount today, that is $6.03 million (in 2022 dollars) per person or $12.06 million (inb 2022 dollars) for a couple.  The IRS has already provided guidance that any gifts to heirs made today will not be “clawed back” under any reduction of the exemption.  What is more, if you make a gift today, that gift removes future appreciation from the taxable amount.  This gifting strategy can be combined with other estate tax planning tools such as estate freeze techniques, discounting techniques, and can be dovetailed with other non-tax goals.

After a farmer takes an honest assessment, he or she can look at several options, such as renting out the farmland or enlisting the service of a farmland management company.  After all, your rental income from your land won’t be worth as much if your heirs have to sell much of it to pay for estate taxes!you have to sell

Just remember to work out that first decision: What happens to the farm if I’m dead?

Once you work with an experienced estate planning attorney to create this basic framework, make a habit of reviewing it regularly.

You should, at a minimum, review the plan every two to three years and make changes based on tax or circumstance changes.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “What’s the Most Important Step in Farm Succession?” read also these additional articles: Is ABLE Account the Same as Special Needs Trust? and Pay Attention to Income Tax when Creating Estate Plans and How Changes to Portability of the Estate Tax Exemption May Impact You and What Healthy Snack Is Best for My Long-Term Health?

Reference: Ag Web (August 1, 2022) “Who Gets What? Take This Important Estate Planning Step”

On July 8, 2022, the Internal Revenue Service issued new guidance that allows a deceased person’s estate to elect “portability” of their unused gift and estate tax exemption for up to five years after their death. So, if your spouse passed away less than five years ago, you may be able to file an estate tax return to transfer their unused estate tax exclusion to yourself.  More about portabilty is discussed in this article entitled “The Portability of the Estate Tax Exemption” by The Balance

What Is Portability, and How Does One Get It?

Portability is a way of transferring the amount of the gift and estate tax exemption that a deceased spouse did not use to the surviving spouse. It is only available to married couples.

To get the benefit of portability, the executor of an estate must file a federal estate tax return. Previously, this return had to be filed within two years of a person’s date of death, assuming an estate tax return was not required sooner. Because so many estates kept missing this window, the IRS decided to extend it to five years.

Let’s say your spouse has passed away, and you are the executor of their estate. If the total value of your spouse’s assets in their estate is below the threshold for federal estate taxation, you may assume that no estate tax return needs to be filed. While this is technically correct, if you do not file an estate tax return, there is no way to transfer over your spouse’s unused estate tax exclusion for your benefit.

The federal gift and estate tax exclusion as of 2022 is $12.06 million per person ($24.12 million for married couples). A person can give away — either during their lifetime or at death — up to this amount, tax-free.

In the above example, if your spouse’s estate were worth $2 million, that would leave an unused exemption of $10.06 million, which you could add to your own $12.06 million exemption, should you ever need it. But you must file an estate tax return for your spouse and complete the section of Form 706 currently entitled “portability of deceased spousal unused exclusion.”

Now Is a Good Time to Consider If You Could Benefit From Portability

The current federal gift and estate tax exemption will be reduced by half in 2026. So, if you have a spouse who died in the past five years, you should consider as soon as possible whether electing portability makes sense.

To be eligible, the deceased spouse must have been a U.S. citizen or permanent resident on the date of their death, and the executor must not have been otherwise required to file an estate tax return based on the value of the total estate and any taxable gifts. If an estate tax return was filed within nine months after the spouse’s death or an extended filing deadline, the portability option may also not be available.

For families with some wealth, this option could result in hundreds of thousands of dollars or more in tax savings. Many families might not have an estate tax problem now, under the gift and estate tax exclusion of 2022. However, if the second spouse dies after 2026, that spouse’s estate could owe hefty taxes. Portability allows you to plan ahead to avoid this problem.

Large Estates Should Not Rely on Portability

Remember this: portability can often be a fix it” provision depending on your estate tax situation.  It is usually better to plan your estate with an “A-B” provision in a testamentary trust, allowing for a estamentary “exemption trust” with a testamentary “marital trust”.  This is because for high net worth individuals who risk going over exemption threshholds, a good plan adopted beforehand can remove all future appreciation as well as all future income on the exemption amount from future estate taxes.  In other words, the preferred estate tax planning approach is to remove $12.06 from the estate tax, as well as all future income and appreciation on that $12.06 million.  You can’t do this with portability unless some of the predeceasing spouse’s exemption is not utilized on that spouse’s estate tax  return.  For a predeceasing spouse whose estate is not large enough to soak up the entire exemption amount, however, portability is a must.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “How Changes to Portability of the Estate Tax Exemption May Impact You” read also these additional articles: What Healthy Snack Is Best for My Long-Term Health? and Who will Receive Naomi Judd’s Estate? and The Biggest Health Mistakes Seniors Make and Remember Medicare’s Important Deadlines and Medicaid Crisis Plans for Long Term Care Costs

Reference: The Portability of the Estate Tax Exemption

When a spouse dies, the surviving spouse has the option of taking the unused federal estate tax exclusion and applying it to their own estate. This is known as electing portability for the DSUE, Deceased Spousal Unused Exemption, according to a recent article “Estates can now request late portability election relief for 5 years” from the Journal of Accountancy.

The portability exemption has grown in use, and the scheduled decrease in the estate tax exemption starting on January 1, 2026, will no doubt dramatically expand the number of people who will be even more eager to adopt this process.

The IRS has extended the amount of time a surviving spouse may elect to take the Deceased Spousal Unused Exclusion (DSUE) from two to five years. The expanded timeframe is a reflection of the number of requests for letter rulings from estates missing the deadline for what had been a two-year relief period. The overly burdened and underfunded agency needed to find a solution to an avalanche of estates seeking this relief. Most of the requests were from estates missing the deadline between two years and under five years from the decedent’s date of death.

To reduce the number of letter ruling requests, the IRS has updated the requirement by extending the period within which the estate of a decedent may make the portability election under the simplified method to on or before the fifth anniversary of the decedent’s death.

There are some requirements to use the simplified method. The decedent must have been a citizen or U.S. resident at the date of death and the executor must not have been otherwise required to file an estate tax return based on the value of the gross estate and any adjusted taxable gifts. The executor must also not have timely filed the estate’s tax return within nine months after the date of death or date of extended file deadline.

If it is determined later that the estate was in fact required to file an estate tax return, the grant of relief will be voided.

Note that this change doesn’t extend the period during which the surviving spouse can claim a credit or a refund of any overpaid gift or estate taxes on the surviving spouse’s own gift or estate return.

The DSUE will become even more popular after December 31, 2025, when the federal exemption changes from $12.6 million per person to $5 million (adjusted for inflation). Given the rise in housing prices, even people with modest estates may find themselves coming close or exceeding the federal estate tax level.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “IRS Extends Time to File Portability Exemption Relief to Five Years” read also these additional articles: Can I Use a Special Needs Trust? and How to Plan in a Time of Uncertainty and Can You Leave an IRA to a Beneficiary? and What Is the Purpose of a Exemption Trust?

Reference: Journal of Accountancy (July 11, 2022) “Estates can now request late portability election relief for 5 years”

There’s a saying in estate planning circles that the only people who pay estate taxes are those who don’t plan not to pay estate taxes. While this doesn’t cover every situation, there is a lot of truth to it. A recent article from Financial Advisor entitled “Estate Planning In This Particular Time of Uncertainty” offers strategies and estate planning techniques to be considered during these volatile times.

Gifting Assets into Irrevocable Trusts to Benefit Family Members. If done correctly, this serves to remove the current value and all future appreciation of these assets from your estate. With the federal estate tax exemption ending at the end of 2025, the exemption will drop from $12.06 million per person to nearly half that amount.

Combine this with a time of volatile asset prices and it becomes fairly obvious: this would be a good time to take investments with a lowered value out of the individual owner’s hands and gift them into an irrevocable trust. The lower the value of the asset at the time of the gift, the less the amount of the lifetime exemption that needs to be used. If assets are expected to recover and appreciate, this strategy makes even more sense.

Spousal Limited Access Trust (SLAT). This may be a good time for a related technique, the SLAT, an irrevocable trust created by one spouse to benefit the other and often, the couple’s children. Access to income and principal is created during the spouse’s lifetime. It can even be drafted as a dynasty trust. Assets can be gifted out of the estate to the trust and while the grantor (the person creating the trust) cannot be a beneficiary, their family can. Couples may also create reciprocating SLATs, where each is the beneficiary of the other’s trust, as long as they are careful not to create duplicate trusts, which have been found invalid by courts. Talk with an experienced estate planning attorney about how a SLAT may work for you and your spouse.

What about interest rates? A Grantor Retained Annuity Trust (GRAT), where the grantor contributes assets and enjoys a fixed annuity stream for the life of the trust, may be advantageous now. At the end of the trust term, remaining assets are distributed to family members or a trust for their benefit. To avoid a gift tax on the calculated remainder, due when the trust is created, most GRATs are “zeroed out,” that is, the present value of the annuity stream to the grantor is equal to the amount of the initial funding of the trust. Since you get back what’s been put in, no taxable gift occurs. The lower the interest rate, the higher the value of the income stream. The grantor can take a lower annuity amount and with decent appreciation of assets in the trust, there will be a larger amount as a remainder for heirs. Interest rates need to be considered when looking into GRATs.

Qualified Personal Residence Trust (QPRT) is a trust used to transfer a primary residence to beneficiaries with minimal gift tax consequences. The grantor retains the right to live in the house at no charge for a certain period of time. After the time period ends, the property and any appreciation in value passes to beneficiaries. The valuation for the value of the initial transfer into the trust for gift tax purposes is determined by a calculation relying heavily on interest rates. In this case, a higher interest rate results in a lower present value of the remainder and a lower gift value when the trust is created.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “How to Plan in a Time of Uncertainty” read also these additional articles: Can You Leave an IRA to a Beneficiary? and What Is the Purpose of a Exemption Trust? and Did Former NFL Tackle and Fox Sports Commentator Tony Siragusa have an Estate Plan? and What are Seniors Doing to Afford Health Care?

Reference: Financial Advisor (July 8, 2022) “Estate Planning In This Particular Time of Uncertainty”

There are numerous benefits for beneficiaries of marital trusts, including asset allocation and tax benefits. An estate planning attorney will be able to determine if they’re the right fit for you, according to a recent article titled “Guide to Marital Trusts” from Forbes.

A marital trust is an irrevocable trust used to transfer a deceased spouse’s assets to the surviving spouse without creating any tax liabilities. Placing the assets in the irrevocable trust also protects assets from creditors and future spouses.

Three parties are involved in creating, managing and distributing a marital trust:

• Settlor: the person establishing the trust.
• Trustee: the person managing the trust and the assets it contains.
• Beneficiary: the person or persons to receive assets in the trust as per directions of the trust.

For a marital trust, the term “principal” is used to refer to assets placed in the trust when it’s established. These may be investment accounts used to generate income for the beneficiary. Real property, retirement accounts and investment accounts may also be placed inside the trust.

A marital trust doubles a couple’s estate tax exemption limit. Estate tax is the federal tax paid on someone’s estate after they die. The federal estate tax exemption is high now, but it won’t always be this high. Therefore, planning for coming years should be done now.

In 2022, the estate tax exemption is $12.06 million. Using an exemption trust would increase the exemption to $24.12 million, potentially shielding $24 million of a couple’s net worth.

Let’s say a settlor passes $5 million to a surviving spouse through an exemption trust. The surviving spouse will be able to pass an additional $19 million to the couple’s children through the same trust, tax free, because of the marital trust. However, this tax move must be made now before the per spouse exemption drops to roughly $6 million automatically on January 1, 2026.

A marital trust also can provide income to the surviving spouse, tax free. The grantor may set a limit on how much can be withdrawn from the trust, something the couple and their estate planning attorney should discuss when the trust is created. When the surviving spouse passes, the trust is passed on to whomever the first spouse’s will says should get the trust—only a surviving spouse may be the beneficiary of a marital trust.

Why should anyone consider a marital trust? This is a way to ensure individuals outside of the immediate family don’t have access to the family’s wealth.

There are other spousal trusts, including Qualified Terminable Interest Property Trusts (QTIP), bypass trusts and Spousal Lifetime Access Trusts (SLAT). The latter may be a very tax-savvy move right now because it uses your full, current estate tax exemption without “claw-back” when the exemption amount is reduced. Ask you estate planning attorney about this. He or she will help you determine which one is best suited to you and your spouse.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “What Is the Purpose of a Marital Deduction Trust?” read also these additional articles: Did Former NFL Tackle and Fox Sports Commentator Tony Siragusa have an Estate Plan? and What are Seniors Doing to Afford Health Care? and Do You Lose Benefits If You Retire Early? and Can Estate Planning Reduce Taxes?

Reference: Forbes (July 10, 2022) “Guide to Marital Trusts”

The estate tax exemption won’t always be so high. The runup in housing prices may mean capital gains taxes become a serious issue for many people. There are solutions to be found in estate planning, including one known as an “Upstream Power of Appointment” Trust, as explained in the article “How to Use Your Estate Plan to Save on Taxes While You’re Still Alive!” from Kiplinger.

The strategy isn’t for everyone. It requires a completely trustworthy, elderly and less wealthy relative, such as a parent, aunt, or uncle, to serve as an additional trust beneficiary. First, here is some background information:

Basis: This is the amount by which a price is reduced to determine the taxable gain. This is often the historical cost of an asset, which may be adjusted for depreciation or other items. Estate planning attorneys are familiar with these terms.  Generally, if you purchased your house for $100,000, and you didn’t have any additions to the house, then your “basis” is $100,000.

Step-up (in-basis): Again, assume your bought a house for $100,000.  If you sell it for $400,000 the day before you die, your taxable gain would be $300,000. Often, this taxable gain is excluded if you are the homeowner selling your home if you meet the conditions under the Internal Revenue Code.  However, the same rule does not apply to your children.  If they were to sell the house for $400,000, they would have a taxable gain of $300,000 (because they did not own and live in the home on your date of death).  If you owned the home on your death, Section 1014 of the Internal Reveune Code, known as the “step up in basis”, works to adjust the basis from $100,000 to $400,000, the fair market value on your date of death.  In other words, with the step up your heirs woud have a new basis of $400,000 eliminating any built in capital gain.  So the benefit is that there would be no capital gain on the sale and no taxes owed.  That capital gain would be approximately $78,000, calculated as 26% X $300,000.  The 26% is the top long term federal capital gain rate plus a 6% Louisiana state income tax rate.

So even though your estate may not be subject to the estate tax, don’t be penny wise and pound foolish when it comes to your estate income tax planning.

Lifetime estate tax exemption: This is currently at $12.06 million per person or $24.12 for married couples. This is the amount of assets which can be passed to children or others free of any federal estate tax. However, the number will take a deep dive on January 1, 2026, when it reverts back to just under $6 million, adjusted for inflation. Plan for the change now, because 2026 will be here before you know it!

Upstream planning involves transferring certain appreciated assets to older or other family members with shorter life expectancies. Since the person is expected to die sooner, the basis step-up is triggered sooner. When the named person dies, you obtain a basis step-up on the asset, saving income taxes on depreciation and saving capital gains on a future sale of the property.  There are other things to consider in such planning, such as medicaid qualification.  In other words, upstream planning may disqualify the older relative from medicaid benefits, so consider such planning carefully.

Most Americans aren’t worried about paying estate taxes now, but no one wants to pay too much in income taxes or capital gains taxes.

To make this happen, your estate planning attorney will need to give an elderly person (let’s say Aunt Rose) certain ownership rights to the asset, such as a usufruct for life.  In other states, a general power of appointment would work, but Louisiana law does not recognize powers of appointment.  If the asset is included in Aunt Rose’s gross estate, then there would be a step up in basis on her death.

Don’t do this lightly, as ownership rights carry legal implications.  Can you protect yourself, if Aunt Rose goes rogue?

While the Internal Revenue Code (“IRC”) rule doesn’t require Aunt Rose to get your permission to control or change distribution of the property, a trust can be crafted with a provision to effectuate the desired result. The IRC doesn’t require Aunt Rose to know about this provision. This is why the best person for this role is someone who you know and trust without question and who understands your wishes and the desired outcome.

So the answer to the question of “Can Estate Planning Reduce Taxes?” is Yes!  Proper planning with an experienced estate planning attorney is a must for this kind of transaction. All the provisions need to be right: the beneficiary need not survive for any stated period of time, you should not lose access to the assets receiving the basis increase, you want a formula clause to prevent a basis step down if the property or asset values fall and you want to be sure that assets are not exposed to creditor claims or any other liabilities of the person holding this broad power.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “Can Estate Planning Reduce Taxes?” read also these additional articles: Addressing Property in Another State in Estate Planning and What Should I Know about Burial Insurance? and Does Potential IRS Change Have an Impact on Estate Plan? and Understanding the Issues of Elder Law

Reference: Kiplinger (July 3, 2022) “How to Use Your Estate Plan to Save on Taxes While You’re Still Alive!”

Collecting art or other valuable items can be a passion for many people. Often such a pastime is more about enjoying the art or the medium itself than about ensuring financial gain. However, once you have accumulated a sizable collection, what do you want to happen to it after you pass away?

It is important that your estate plan address your art separately from your other assets.

The first step in estate planning for your collection is to document it. You should not only have the collection appraised, but also take photographs of each item and assemble any paperwork relating to the authenticity and origin of the pieces in your collection, including artist notes, bills of sale, or insurance policies.

According to an article by Bank of America entitled “Your Art Collection and Legacy Planning”, they give you three main options when considering what to do with your art collection:

• Sell the collection. If your family is not interested in maintaining your collection after you are gone, then you may want to sell it.

If you sell the collection while you are alive, you will have to pay capital gains taxes on the collection’s increase in value since you purchased it. The capital gains tax rate on artwork is 28 percent, compared with the top rate of 20 percent for other assets.

If the collection is sold after you die, however, it will be included in your estate, possibly increasing the value of your estate for estate tax purposes, but it will be “stepped up” in value. In other words, the increased value for income tax purposes likely will not subject to artwork to income taxes.  This means that if your heirs sell the collection, they will have to pay capital gains tax only on the amount by which the pieces have increased in value from the date of your death to the date of sale.

• Leave the collection to your heirs. You can give your artwork to individual family members, but a better approach may be to put the artwork in a trust or a Limited Liability Company (LLC).  The trustee of the trust or manager of the LLC whom you appoint will be responsible for sustaining the collection, including maintaining insurance on the artwork, arranging storage, and making decisions about selling and buying pieces. You can leave instructions for care and handling of the collection. Any profits from the sale of items would be split among the beneficiaries of the trust or members of the LLC.
• Donate the collection. You can donate your artwork while you are still alive and receive an income tax deduction based on the value of the items. This can be a good way to pass on your collection while avoiding capital gains taxes, and in addition, generating a charitable deduction for income tax purposes during your life.  Should you choose to donate through your estate after your death, your estate will receive an estate tax deduction based on the collection’s value, but there likely will be little income tax benefits (due to the step up in basis of the artwork).

Deciding which option to take will depend on your circumstances, your current and future income tax and estate tax position, as well as your family’s interest in the collection. Talk to your attorney to figure out the best option for you.

BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.

If you liked this article, “Three Estate Planning Options for Your Art Collection” read also these additional articles: What Common Mistakes are Made with Living Trusts? and How Do I Maximize My IRA? and Can My Pet Help Me in Old Age? and Can New Program Help Dementia Patients?

The proposed amendment is designed to fix some loopholes in a 2019 regulation passed in response to the 2017 Tax Cuts and Jobs Act. The 2017 law doubled the value of the estate and gift tax exemption until December 31, 2025, when it goes from $12.06 million to $5.49 million. According to this recent article from Financial Advisor titled “Amending The IRS’s Anti-Clawback Provision on Gifting,” the law generated concern among those who wanted to make large gifts to take advantage of the historically high federal estate and gift tax exemption.

The concern was whether the IRS would attempt to clawback the taxes, if the taxpayer died after 2025. This is when the estate tax reverts back to a much lower number. A regulation was issued in 2019 to reassure taxpayers and explain how they could take advantage of the high exemption as long as they made gifts before 2026, regardless of the exemption at the time of their death.

The IRS recognized this as a good step. However, it had a loophole and hence the new proposed amendment. The amendment provides clarity on what constitutes an actual gift. If the donor garners a benefit from the gift or maintains control over the gift, is it really a gift?

Giving the gift of a promissory note worth $12.06 million to lock in the high exemption and leaving it unpaid until death, for instance, is not a gift. The person is not actually giving anything away until after death. Therefore, the note is part of the taxable estate and bound by the estate tax exemption amount in place at the day of death.

The same goes for a person who gives ownership interests in a limited liability company, while continuing to serve as the company’s manager. Taxpayers must be very careful not to mischaracterize their gifts to stay on the right side of this regulation.

Another example: let’s say a person puts a $12 million vacation home into an LLC, with clear directions for the home to be kept in the family, and then makes gifts of the LLC ownership interests to the children. If the donor wants those gifts to max out the current $12.06 million exemption, rather than be subject to the lower exemption in place at the date of death, the owner should not be the manager of the LLC. The same goes for the owner living rent-free in any property he’s gifted to anyone, if the wish is to take advantage of the gifting exemption.

In the same way, a mother who places money into a trust fund for a child may not serve as a trustee and control the assets and distributions, if she wishes to take advantage of the tax benefit.

If your estate plan uses grantor annuity trusts (GRATs), Grantor Retained Income Trusts (GRITs) and qualified personal residence trusts (QPRTs), speak with your estate planning attorney. If you die during the annuity period or term of the trust, your estate may lose the benefit of the anti-clawback regulation.

If the amendment is approved, which is expected in late summer, make sure your estate plan follows the new guidelines. If you are truly giving gifts before 2026, you will likely be able to take advantage of this substantial tax benefit and pass more of your estate to your heirs.

BOOK A CALL with me, Ted Vicknair, Board Certified Estate Planning and Administration Specialist, Board Certified Tax Law Specialist, and CPA to learn more about estate planning, incapacity planning, and asset protection.

If you liked this article, “What Is the Proposed IRS Anti-Clawback Provision?” read also these additional articles: Why Is Beneficiary Designation Important? and Does Diabetes Increase Chances of Suffering from Dementia? and Protecting Your House from Medicaid Estate Recovery and How Do I Plan for Taxes after Death?

Reference: Financial Advisor (May 27, 2022) “Amending The IRS’s Anti-Clawback Provision on Gifting”