Legal Matters: Ideas for your year-end estate and income tax planning

By Jonathan H. Hoagland

The end of the 2019 calendar year is fast approaching and now is the time to take advantage of some estate and income tax planning strategies before the New Year’s Eve ball drops.{mprestriction ids="1,3"}

Increased Transfer Tax Exemptions. In the 2017 tax act, the estate and lifetime gift tax exclusion amount was increased from $5 million (indexed for inflation) to $10 million (indexed for inflation). For 2019, the exclusion amount is $11.4 million. The increased exclusion amount is only available for decedents dying and gifts made after 2017 and before 2026. A decedent’s estate or lifetime gifts above the exclusion amount is subject to the 40 percent estate and gift tax rate. For this reason, if you have a taxable estate, you should annually consider the following planning opportunities to reduce the size of your estate:

1. Annual Exclusion Gifts. A popular strategy to make gifts without using any of your lifetime gift tax exclusion is to take advantage of the annual gift tax exclusion. For 2019, you may gift assets up to $15,000 in value to a person without using your lifetime gift tax exclusion, and you may make such gifts to an unlimited number of people. For example, if a parent gifted $15,000 of stock to each of her five children, the parent will transfer $75,000 of assets without using any of the parent’s lifetime gift tax exclusion. The parent’s spouse may also make similar transfers. If a couple has 20 descendants, together they could gift $600,000 annually without using any of their lifetime gift tax exclusions.

2.  Tuition and Medical Payment Exclusion. Tuition payments made on behalf of a person do not use any of your lifetime gift tax exclusion or annual gift tax exclusion. Also, any payments for a person’s medical care gets the same tax-free treatment. To qualify for these exclusions, you must make the payments directly to the educational organization or medical provider. A cash distribution to a person to pay the tuition or medical costs does not qualify for the exclusion.

3. 529 College Savings Plans. Contributions to a 529 college savings plan do not qualify for the tuition payment exclusion, but do qualify for the annual gift tax exclusion. Also, a special rule allows a contributor to make up to five annual gift tax exclusion gifts ($75,000) in a single year when funding a 529 plan for a beneficiary. But, if you make a five-year gift in 2019, you would not be able to make another annual gift tax exclusion gift to the beneficiary until 2024. You and your spouse could make a 2019 gift of up $150,000 to a 529 plan for a beneficiary under this strategy.

4. Gifts in Trust. You might not want to make outright gifts to children or grandchildren because you lose control over how the gifted assets might be spent. A gift in trust allows you to set the rules for how, when and why beneficiaries will receive money. If certain rules are followed, you may make gifts to a trust that you create and the gifts will still qualify for the annual gift tax exclusion.

Charitable Gifts. In addition to making gifts to family members and friends, charitable giving is a form of estate planning because a gift to charity is not subject to estate or gift tax and provides the donor with an immediate income tax deduction.

1. Give Appreciated Property. If you donate appreciated assets to charity, you get a charitable contribution deduction and avoid the capital gains tax that would be due if you sold the asset and then donated the money to charity. Generally, the higher the appreciated value of an asset, the bigger the potential value of the tax benefit.

     2. Qualified Charitable Distributions. If you are 70 1/2 years old and older and are required to take minimum distributions from your IRA, you can take advantage of a special rule that allows you to make a charitable contribution directly from your IRA to a charity. An IRA distribution directly to a charity counts toward your required minimum distribution and the distribution amount is not included in your taxable income.

3. Bunching Gifts. If your annual charitable gifting does not enable you to itemize your deductions, you should consider making a larger charitable gift in one calendar year and use the standard deduction in other years.

Income Tax Planning. Finally, in addition to charitable gifts, you should consider the following income tax planning opportunities: 1. Accelerate income into 2019 if you expect 2020 income to be significantly higher because of increased income or substantially decreased deductions, 2. Defer income until 2020 if it looks like you may have a significant decrease in income next year from a reduction in income or an increase in deductions, 3. Accelerate deductions into the current year to offset the higher income this year if you expect a decrease in income next year, and 4. Defer deductions into 2020 if you anticipate a substantial increase in taxable income next year. I recommend that you consult with your CPA to discuss the options available for each of these income tax planning opportunities.

The end of the calendar year is usually filled with excitement and cheer, but don’t forget to take advantage of these exciting planning strategies before 2019 expires.

Jonathan H. Hoagland is an attorney with the Salt Lake City firm Durham Jones & Pinegar and is a member of the firm’s Estate Planning and Tax sections. His practice focuses primarily on trust and estate planning, transfer tax planning, trust administration matters and charitable gift planning.{/mprestriction}