“More tax, please?” Said no one ever. Although death and taxes are two things we can’t avoid, you can employ tactics to divert more of your hard-earned savings to your family instead of Uncle Sam. These strategies arise in the context of estate tax, capital gains tax, and income tax.
- Estate Tax: Start gifting, elect portability, or lock in the exemption now.
Currently, the estate tax exemption is $11.58 million, so each person has an $11.58 million “coupon” they can use to pass assets free of tax, before incurring the 40% tax penalty for assets that exceed the exemption. Unfortunately, there aren’t many people with this problem, but no one knows when they will pass and what the exemption will be then. For example, the exemption used to be $600,000, and on January 1, 2026, it is slated to decrease again. Needless to say, it’s important to be mindful of the estate tax exemption, so that you can use it.
Gift Now. In 2020, you can give away $15,000 tax-free to as many people you’d like. (Do you want my address?) Importantly, this amount does not count against your estate tax exemption. If you have sufficient assets to support yourself, gift now so you don’t get caught with a taxable estate later and are unable to reduce it quickly.
Elect Portability. Portability is a concept that allows married couples (who are both U.S. citizens) to essentially “inherit” each other’s estate tax exemption. But the survivor does not automatically inherit the unused exemption. It must be claimed on a tax form. Even if you think you may not need the double exemption, elect for portability to preserve the potential to pass money tax-free later.
Lock in the Exemption Now. You don’t have to wait to die to use your estate tax exemption. Should you have an asset, like a family business, that you expect to appreciate significantly, consider gifting it now to allow your family tax-free appreciation in the future.
- Capital Gains Tax: Take advantage of not only one, but two step-ups in basis.
Typically, you’ll be taxed on the gain between the amount at which you acquired an asset and what it sells for. If you have an asset that has appreciated significantly since its purchase, don’t sell or donate before you pass. By allowing your heirs to inherit the property, they will receive the asset at its current fair market value (a “stepped-up” basis), and eliminate the capital gains tax. If that asset is community property, you can also include it in the surviving spouse’s estate and receive a second step-up when he or she passes. (Use caution with the second step-up, however, and consider whether including that asset in the survivor’s estate might push the estate over the estate tax threshold).
- Income Tax: Take more than the Required Minimum Distribution (RMD) now.
With the passing of the SECURE Act at the end of last year, IRA beneficiaries can no longer “stretch” their inherited IRAs over their lifetime. Instead, the beneficiary now needs to withdraw all inherited IRA funds within ten years. Should a beneficiary be in their prime earning years, this inherited money could increase their income tax liability and reduce the amount of benefits received. Conversely, if the IRA owner has no earned income when he or she withdraws RMDs, it may make sense to withdraw more than the required amount and divert those funds to Roth IRAs, insurance, or other assets that can be inherited without incurring any income tax liability.
The information in this column, which was sponsored by Solak Legal as part of The Leader Expert Series, is intended to provide a general understanding of the law and not legal advice. Readers with legal questions should consult attorneys for advice on their particular circumstances. Jennifer Solak provides legal advice for families and businesses and may be contacted at email@example.com or 713-588-5744.