MYTH: Where a settlement is small (less than $50,000.00), the client should not use a…
Tax Strategies to Explore Now
It appears more likely than not the United States is headed towards a split government next year. For purposes of tax planning next year, we can probably assume that control of Congress is divided between Republicans and Democrats and we have a Democratic President. This result should mitigate some of our clients’ fears, i.e., tax increases, a drastic reduction of the current estate tax exemption amount (“ETEA”).
Some tax strategies that we recommend including gifting through a SLAT and residency planning:
1. The feared estate tax increase has likely been deferred.
The ETEA, absent a subsequent change in law, will sunset on December 31, 2025, and will reduce to $5 million, adjusted for inflation. With a split government, the risk of a major near-term reduction of the ETEA is low. However, the risk of a major medium-term reduction of the ETEA is higher over the next few years.
If the change does occur, it could likely eliminate over $6.58 million of ETEA available for sheltering the transfer of wealth on an estate tax-free basis. For this reason, a Spousal Lifetime Access Trusts (“SLATs”) remain an excellent option for many clients. At its most basic, a SLAT is a gift from one the donor spouse to an irrevocable trust for the benefit of the beneficiary spouse and children. The beneficiary spouse can receive distributions from the SLAT, but the SLAT is designed to be excluded for the beneficiary spouse’s “gross estate” and is not subject to estate tax when the beneficiary spouse dies. SLATs are popular amongst married couples because the SLAT property remains accessible to the donor spouse through their spouse as beneficiary. Typically, the surviving spouse is the Trustee with the ability to distribute trust principal to himself or herself for their “health, education, support and maintenance.” Upon the death of the beneficiary spouse, the assets remaining in the SLAT pass to the children free of estate tax.
2. Consider your domicile. The pandemic has shown the ease at which the workforce can transition to a full work from home capacity. This environment presents the opportunity for certain clients to legally change their domicile to a lower tax jurisdiction. Many clients who had second homes left their urban office and worked through the pandemic at their lake or vacation home.
For some clients, a change in state domicile may be a viable alternative to lower the overall tax burden faced. In changing domicile care must be cautiously taken as each state has its own intent driven indicators such as length of time, voter registration, driver’s license, etc. States have also taken a more aggressive stance because of lost tax revenue. With our Florida office (see https://flresidency.com), we often can guide a client through the process and build up a defense to a possible state income tax audit.
In summary, there is no time like the present to utilize these https://flresidency.com/. SLATs and other smart gifting strategies are freeze techniques where the client is ensuring future appreciation of the assets are not taxed in the client’s estate. Likewise, domicile calculations are based upon days present in each state. While the full results of the United States election will not be known until early January, we recommend clients think about tax strategies for 2021 now.
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