Estate Planning as Part of the Form 1040 Interview

When interviewing clients this tax season, despite the obvious emphasis on income tax, keep in mind the importance of estate planning as it can benefit both you and the client.   

For example, there may be advantages to lifetime transfers to take advantage of the current transfer tax exemption, but there are also income tax basis considerations (See also the author’s “Checklist for Working With a Decedent’s Estate,”,  5/19/21).  The emphasis here is a multitude of topics with brevity toward the goal of discovering client needs and areas of possible interest. Our narrative may be a brief discussion or even Q&A in style.

Estate and Gift Tax Overview

The gift and estate tax exemption is currently generous. The 2022 gift and estate tax exemption is $12,060,000 or $24,120,000 for a married couple.

After 2025, the exemption is scheduled to revert to an amount some estimate as around $6,200,000 as adjusted for inflation or $12,400,000 estimated amount for a married couple. The highest estate tax rate is 40 percent.

Exemption amounts used against the lifetime gift tax reduce the amounts available against death-time transfers. The IRS has confirmed that individuals taking advantage of the enhanced exclusion amount available for 2018 through 2025 are not to be adversely impacted when exemptions revert to pre-2018 levels as adjusted for inflation. The 2022 annual gift tax exclusion is $16,000 whereas 2021’s exemption was $15,000.

  • Keep in mind gift splitting, which doubles the exemption per donor
  • Exemption applies to gifts of a present interest
  • Basic tax planning includes using the annual gift tax exclusion
  • Gifts in excess of the annual exclusion begin to use the exemption
  • Direct payments for medical and education are subject to special exemptions

Marital Rules

Portability, when elected, allows a surviving spouse access to the predeceasing spouse’s unused exemption amount.  Here, you should ask the client:

  • Any marital gifts to discuss or consider in planning?
  • Should there be marital gifts to clarify or modify ownership from an administrative or tax standpoint?
  • Does the estate plan include A-B trusts?
  • Any qualified domestic trusts (QDOTs) in the estate plan?

General Planning

The questions here should be as follows:

  • Are estate planning documents in place and current? (This includes wills, trusts, powers of attorney, medical powers of attorney)
  • Any health issues for either spouse that may affect our planning options?
  • Any gifts to children  or grandchildren to discuss?
  • Should either spouse (or both spouses) consider non-marital transfers during life or at death?  
  • Any plans to move to another state, one with transfer tax provisions?
  • Any international implications to assets or family relationships?
  • Any significant basis issues that affect planning?

Consider discussing post-death asset control and management considerations. Ask if there is life insurance in place and also discuss life insurance in estate planning.

  • Is there any current litigation or prospective litigation that may affect the estate plan?
  • Is estate liquidity an issue?
  • Should low-interest rate loans within the family be considered as a vehicle for reducing values subject to transfer tax?
  • Are there unusual or difficult-to-value assets that affect the estate plan – artwork, bitcoin, entities created for the purpose of self-insurance, Section 1202 stock, investments in qualified opportunity zones, foreign real estate?
  • Are there issues of loss or credit carryovers that may expire at death?
  • Any business or investment assets with significant unrealized loss?

Some practitioners may also want to discuss asset protection planning with the client.

Business or Farm Interests/Entities

  • Are there partial interests in farms or realty with family, friends or others, and if so, what assets?
  • Trusts are subject to relatively high income tax barring distributions, but they can enhance asset management. Trust design options are varied.  Are trusts in place that benefit the taxpayer or other members of the family?
  • Are there QTIP trusts in the estate plan?
  • Should grantor retained annuity trusts (GRATs) be considered as a possible means of transfer tax reduction?
  • Have circumstances changed such that business organization structure (partnership, S corporation, C corporation) needs review, particularly considering the long-term and ownership after death?
  • Are valuation reduction strategies in place or should they be considered?
  • Should family limited partnerships be considered as a vehicle of control and valuation reduction?
  • Is farm valuation an issue; e.g., a family member continuing operation as a farm can have tax considerations
  • Can the estate qualify for extended payment of estate tax because of small business interests?

Also find out if there issues of  business “exit planning” with estate planning elements; e.g., integrating children into management and/or company ownership, tax-free merger, sale of privately-held business interests to employees or others.

Charitable Planning

The estate tax charitable deduction is unlimited. Lifetime charitable transfers can save income tax and estate tax.  Should charitable dispositions be considered to reduce or avoid estate tax? Also:

Is asset selection a charitable planning issue?  For example, should charitable gifts of long-term highly appreciated listed stock be considered.? Also, should the following types of charitable vehicles be considered in lifetime or testamentary planning:

  • Charitable remainder trusts
  • Charitable lead trusts
  • Private foundations
  • Donor advised funds
  • Gifts of the remainder interest in personal residence
  • Conservation easements

The Prospects of Significant Change

Weighing the current rules against the future tax environment is one of the most difficult aspects of planning. President Biden has generally advocated reduced estate tax exemptions and enhanced taxation of the wealthy. However, as we enter March, 2022, the emphasis on new tax legislation is somewhat reduced for lack of Congressional agreement on direction or details.  

In general, one would anticipate President Biden’s emphasis to return in the near future, albeit whether and when that will translate into increased transfer tax is quite uncertain. It seems unlikely any increased transfer tax would be retroactive. However, effective dates for transfer tax increases may be announcement dates rather than eventual enactment dates.   

Another significant planning issue, of course, is the scheduled reduction in transfer tax exemptions after 2025. In the end, asking these kinds of questions during tax time can indeed lead to further benefits for your clients and your business.

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