Get Your Estate Plans in Order for Year-End

Here are three estate planning strategies to consider before the end of the year to assist in transferring wealth.

The transfer of wealth has typically been subject to tax – whether it’s done now (via gift tax) or after death (via estate tax). Over the past 20 years, though, lawmakers have carved out certain exemptions to these taxes. The American Taxpayer Relief Act of 2012, for example, allowed taxpayers to transfer up to (roughly) $5 million tax-free. But in 2017, the Tax Cuts and Jobs Act opened an eight-year window that allows significantly more wealth to be transferred in a lifetime – more than $12 million for individuals in 2022 and $24 million for couples. That window closes after 2025, at which point the lifetime gift and estate tax exemption amount will be cut in half.

For those with especially sizable estates, the next few years offer a rare opportunity to transfer significant wealth without gift or estate tax. To take advantage of this closing window, you might benefit by putting a plan into motion before the end of 2022. Here are three wealth transfer strategies to consider as the year comes to a close.

Gifting to Children and Others

The most direct way to transfer wealth is through gifting. Individuals can gift up to $16,000 per year (the annual exclusion amount for 2022) to as many people as you like without having to notify the IRS, and married couples can double that per-person amount. You also might decide to take advantage of 2022's bear market by gifting assets that have declined in value – if you pursue that strategy, you might consider selling the assets first, taking the loss and gifting cash. (Note that if you gift an individual cash via a check, that check must be cashed or deposited by year-end to qualify as a gift for this year.)

Education planning offers another gifting opportunity. Through 529 college savings plans, you can fund five years’ worth of annual exclusion gifts, or $80,000 ($160,000 for married couples), in one year. You just have to denote your five-year gift on your federal tax return and not make additional gifts to the same recipient during that period.

Using Trusts To Minimize Estate Tax

Trusts – particularly irrevocable trusts – can be effective vehicles to transfer wealth without incurring estate or gift taxes. For example, a Spousal Lifetime Access Trust allows a spouse to gift property to an irrevocable trust for the benefit of the other spouse (if identified as the SLAT’s beneficiary). The gift is designed to draw down the lifetime gift and estate tax exemption, and because it does not qualify for the unlimited marital deduction, the SLAT's assets remain under the beneficiary spouse's control without contributing to their estate.

An Irrevocable Life Insurance Trust is a trust financed with a life insurance policy that’s opened during your lifetime. Like a regular life insurance policy, an ILIT gives you control over how the policy proceeds are paid to beneficiaries after death, but because the trust is irrevocable, proceeds are not considered part of your estate and thus can avoid estate tax. 

It’s important to remember that while life insurance can be an important part of a well-thought-out estate plan, it’s rarely set-it-and-forget-it and end of year is a great time to review your insurance policies as well as your estate plan. Here are some common mistakes people make when taking out a life insurance policy.

Making Charitable Donations

Donations to charity can have the dual benefit of helping those in need while reducing the value of your estate. One common strategy is known as bunching. By increasing the standard deduction amount, the Tax Cuts and Jobs Act negated much of the benefit of itemized deductions – however, if you choose to “bunch” multiple years of deductions into one year, you can still reap the benefit of itemized deductions one year and take the standard deduction the next. Better still, with planning, you can arrange it so that the organizations you’re helping still receive an annual benefit.

Bunching is one of several year-end strategies involving charitable giving you might consider. These other ideas might be especially valuable in 2022, given the fluctuations in this year’s stock market.

The end of the year is also the perfect time to review how your existing estate plans are structured and make sure they still reflect your wishes. Take some time now to ask questions like:

• Are your assets titled correctly?
• Do you need to update beneficiary designations on retirement accounts? This is especially pertinent in 2022, as the distribution rules for inherited accounts have changed in recent years. 
• Who do you have listed as guardian, trustee, executor or power of attorney? Are they still the most appropriate choices? Who the best candidates are for these important roles tends to evolve as we age.

There’s a lot that goes into creating and maintaining the right estate plan for your personal circumstances. If you want to bounce ideas off someone who understands both your finances and your values, your Baird Financial Advisor is only a phone call away.

The information reflected on this page are Baird expert opinions today and are subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action.