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As 2020 comes to a close, it is important to consider estate and gift tax planning strategies and to closely review your estate plan.  The article outlines the tax changes from 2020 to 2021 and discusses income tax and estate and gift planning considerations.

Federal Estate Tax.

In 2020, the federal estate and gift tax exemption is $11,580,000. The exemption increases to $11,700,000 in 2021. The value of a person’s estate and/or lifetime gifts exceeding the exclusion amount is subject to a 40% estate and gift tax rate. Further, through a so-called “portability” provision, if a spouse dies after 2010 without exhausting his or her estate and gift tax exclusion amount, the surviving spouse may be able to use the deceased spouse’s remaining exclusion amount against his or her transfers during lifetime or at death by filing an estate tax return within two years of the decedents date of death and making the portability election.

The federal estate and gift tax exemption is scheduled to sunset in 2026 to $5,000,000 (indexed for inflation). The new Biden Administration plans to reduce the exemption even sooner, as early as the beginning of 2021. Careful planning should be considered in order to take advantage of the current exemption before it is potentially cut in half.


Federal Gift Tax.

The annual exclusion for gifts remains at $15,000 per person for 2021. Direct payments for tuition and medical expenses are exempt from gift tax. Making annual exclusion gifts is one of the easiest ways to maximize wealth transfers to future generations.

A person is not limited as to the number of donees to whom he or she may make such gifts. Further, because the annual exclusion is applied on a per-donee basis, a person can leverage the exclusion by making gifts to multiple donors (family and non-family). Thus, if an individual makes $15,000 gifts to 10 donees, he or she may exclude $150,000 from tax. In addition, because spouses may elect to apply their exemptions to a single gift from either spouse (“gift-splitting”), married individuals may effectively double the amount of the exclusion to $30,000 per donee. A person may not carry over his or her annual gift tax exclusion amount to the next calendar year.

The annual gift tax exclusion applies to gifts of any kind of property, as long as the gift is of a present, rather than a future, interest. Gifts of appreciated property also could result in income tax savings to the giver, because the recipient would pay the capital gains tax on any sale. Therefore, before giving away appreciated property that is likely to be sold, consider the income tax cost to the recipient.

A special rule allows a contributor to utilize up to five annual gift tax exclusions simultaneously when funding a 529 plan. Thus, for 2020, he or she may fund the plan with up to $75,000 (5 × $15,000), then elect on his or her gift tax return to spread this gift over five years (2020 through 2024). By using five annual exclusions, the entire gift becomes gift-tax-free. However, the contributor must wait until 2025 to make another tax-free contribution to this plan, or any annual exclusion gifts to that individual.


Low Interest Rates.

The interest rate is currently at historically low rates. Consider taking advantage of the current low-interest rate environment by loaning or borrowing money. If you have existing family loans, consider restructuring them. In addition, grantor-retained annuity trusts and charitable lead trusts are just a couple estate planning vehicles that become even more beneficial in a low-interest environment.


Proposition 19

Under current California law, a property owner can transfer a primary residence and up to $1 million in assessed value of any other property to their children (and qualifying grandchildren) and the assessed value(s) would transfer with the property, thus avoiding property tax reassessement.

With the passing of Proposition 19, the avoidance of property tax reassessment will be drastically limited for property transfers made after February 15, 2021. Under the proposition, only $1 million of assessed value of a property owner’s primary residence can be transferred to a child without triggering reassessment. In addition, the property must be used as a primary residence in the hands of the child for this to work. If you have a property that you plan on keeping in the family for multiple generations (whether it be a primary residence, vacation home, or rental property), consider transferring the property to your child or to an irrevocable trust.


Trust Tax Rates

See below for the current tax rates versus the tax rates for 2021.

2020 Trust Tax Table

If taxable income is: Then income tax equals:

Not over $2,600                                  10% of the taxable income

Over $2,600 but not over $9,450        $260 plus 24% of the excess over $2,600

Over $9,450 but not over $12,950      $1,904 plus 35% of the excess over $9,450

Over $12,950                                      $3,129 plus 37% of the excess over $12,950


2021 Trust Tax Table

If taxable income is: Then income tax equals:

Not over $2,650                                  10% of the taxable income

Over $2,651 but not over $9,550        $265 plus 24% of the excess over $2,650

Over $9,551 but not over $13,050      $1,921 plus 35% of the excess over $9,550

Over $13,051                                      $3,146 plus 37% of the excess over $13,050


Capital Gains

The adjusted net capital gain of an estate or trust is taxed at the same rates that apply to individual taxpayers.

  • A 0% rate applies to adjusted net capital gain that, if it were ordinary income, would be subject to the 10% income tax rate
  • A 15% rate applies to adjusted net capital gain that, if it were ordinary income, would be subject to the 24% or 35% income tax rate
  • A 20% rate applies to adjusted net capital gain that, if it were ordinary income, would be subject to the 37% income tax rate


Investment Income Surtax

In 2021, a 3.8% surtax applies to the lesser of (1) undistributed net investment income (NII) or (2) any excess of adjusted gross income over $13,050. Any given item of NII is included in the NII of either the trust/estate or its beneficiary. Distributed NII is NII to the beneficiary as indicated on Schedules K-1, and undistributed NII is NII to the estate or trust.


Methods to Reduce Surtax Liability

The 3.8% surtax applies to income from a passive investment activity. To help reduce the amount of income subject to the surtax the following should be considered:

  • For complex trusts, compare the tax with and without distributions to beneficiaries to determine whether the trust or individual is in the lower tax bracket
  • Use Installment Method to spread out gain on sale over multiple years
  • Use like-kind exchanges to defer gains
  • Recognizes losses to offset gains



Some strategies that can be used to accelerate or defer income and/or deductions are looking at the:

  • Timing surrounding payment of state income taxes and property taxes, keeping in mind the new law limits the aggregate deduction for state and local taxes, including income taxes and property taxes, to $10,000 per year. Property taxes related to the production of income and investment holdings do not fall under this limitation and can be deducted in full.
  • Timing surrounding payment of other trust expenses (i.e. fiduciary, accounting, legal)
  • Revisiting the trust’s distribution strategy to see if more income can be passed out to beneficiaries taxed at a lower rate than the trust


Trust Agreements

Review your trust agreement and make sure it still makes sense given the current estate and gift tax regime and the potential changes to the regime in the coming years. Review and update beneficiaries, trustees, and the titling of assets, as needed.

If you would like to discuss these and other year-end tax planning ideas, please contact your L&B Advisor.


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