Year-end ideas for gifting and estate plans

Bill Cass, CFP®, CPWA®

Bill Cass, CFP®, CPWA®, 12/02/20


Year-end can be a time to reflect on the past year as well as look ahead.

For financial planning, it’s an opportune time to review estate planning and gifting ideas.

Review current estate and gift tax rules

Year-end provides an opportunity to review existing estate plans and consider gifting strategies. The annual gift tax exclusion for individuals allows gifts of up to $15,000 per individual ($30,000 for married couples splitting gifts) without having to file a gift tax return. Additionally, for 2020 the lifetime, combined estate and gift tax exclusion is $11.58 million per individual (increasing to $11.7 million for 2021). Since the passage of the Tax Cuts and Jobs Act several years ago, the drastic increase in the lifetime exclusion means that investors should review existing trusts and other documents with their attorney to see if any modifications are necessary. Also, there may be opportunities for large lifetime gifts, considering the historically high level of the exclusion amount. There is always a chance that the lifetime gift/estate tax exclusion may be reduced in the future.

Discuss year-end gifting strategies using 529s

During this holiday season, consider the gift of education.

Remind certain investors, such as grandparents, that the annual gifting limit for 2020 is $15,000, and that a special 529-plan exclusion allows five years’ worth of gifts — up to $75,000 or $150,000 for married couples — to be contributed at once, provided that no other gifts are made within the next five-year period.

There is an added benefit for grandparents who own 529s. These assets are not currently factored as assets for determining federal financial aid under the FAFSA process. However, distributions from these accounts may be counted as part of the income test portion of the financial aid calculation. Lastly, recent tax law changes allow 529 account owners to withdraw $10,000 for K–12 tuition expenses and $10,000 to repay student loans. They also allow distributions for qualified apprenticeship programs.

Families may also want to “supersize” a contribution to a 529. If donors act before year-end, they can front-load six years’ worth of gifts within a short time frame. Consider giving $15,000 (maximum annual gift allowance) in December, and then an additional $75,000 in January. The end result is funding $90,000 at roughly the same time. A married couple could double this amount. Increased saving means less borrowing for students. Student debt in the United States reached a record $1.68 trillion this year.

Beneficiary review helps multiple strategies

While individuals may not be focused on financial documents, it is important to capture beneficiary changes due to life changes. Year-end is an opportune time to offer a beneficiary review to ensure that accounts are up-to-date.

Why a beneficiary review is critical

  • It’s important for investors to update their beneficiaries to keep estate planning goals on track. Life situations, such as divorce, can lead to complications later if documents are not updated. For example, a forgotten account may be inherited by an ex-spouse.
  • If no beneficiaries are designated, an estate must generally go through the probate process. Most individuals try to avoid probate because it is a costly and public process and lengthens the time it takes to settle an estate. Documents can be prepared to avoid probate, but beneficiaries need to be named.
  • Investors need to be mindful that some IRA agreements or plan documents may identify “default beneficiaries” in cases where there is no named beneficiary. Potential tax-saving opportunities may be missed if documents are not up to date.

Seek expert advice for advanced strategies

It is important to consult a financial advisor to understand how estate tax and gift tax rules may affect your personal financial plan. Individuals considering advanced planning strategies around estates, such as a trust, should work with a qualified estate planning attorney who has knowledge of their financial situation and goals.

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