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Jan 04, 2021

Financial Planners: Make Transfer Tax Exemptions an Option for Your Clients

Transfer tax exemptions were one of the many aspects of the tax world that were affected by the 2017 Tax Cuts and Jobs Act. The legislation affected options around gifting, rules for individuals vs. couples, and so much more. To find out the status of these exemptions, as well as whether the results of the presidential election may affect them even more, we spoke with J. Victor Conrad, founder of PINNACLE Financial Strategies LLC in Wexford, Pa.

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By: Bill Hayes, Pennsylvania CPA Journal Managing Editor

Podcast Transcript

One of the many aspects that was altered by the Tax Cuts and Jobs Act of 2017 was the rules around transfer tax exemptions. In today's podcast, we will address whether the guidelines around transfer tax exemptions change if you are an individual or a couple, options for gifting, and yes, whether the results of the 2020 presidential election may have an effect on these rules altogether. We'll cover this topic with J. Victor Conrad, founder of PINNACLE Financial Strategies LLC in Wexford.

For a bit of context, can you tell us what transfer tax exemptions, or lifetime exemptions, are and how they work? What are they meant to accomplish?

[Conrad] The lifetime exemption is really related to whether someone's estate triggers federal state taxes or not. It's the dollar amount that an individual can pass at death and not have it taxed for federal income taxes. That dollar amount in 2020 is now $11.58 million, and that's per individual.

How did the Tax Cuts and Jobs Act affect the rules around transfer tax exemptions, and what do CPA planners have to keep in mind when working with those rules?

[Conrad] The Tax Cuts and Jobs Act effectively doubled that number to the 11 million, and it's been indexed for inflation a little bit. The word that I have for CPA advisers, and my background quickly, and I joke, I'm a recovering CPA. I'm inactive with my license, but a full-time certified financial planner. I don't try to go this alone. Those of you listening to this podcast, you may not have a client in your book of business that has this type of net worth. And that $11.58 million is per person. If it's a married couple, then double that.

But if you do, they're probably one of your bigger, better clients and starting the conversation and working with their family attorney and their financial adviser, and really creating a team can help start the conversation of how do we structure the estate, whether there's a business ownership involved with it, or it's just all investible wealth in mutual funds and stocks and bonds. But be aware of it, to the CPA's listening, and don't be afraid to bring others around and form a team to make sure that your taxpayer client has the best experience and outcome as possible.

Is there any concern that these rules may change according to the results of the election season that we just saw?

[Conrad] Definitely. And not to be political, it looks like now Biden is the president elect, though Trump is going to use his right to question and sue. Biden has proposed bringing these lifetime exemption numbers back to where they were in 2009, which was $3.5 million per person, and a beginning tax rate above that of 45%.

And a quick side note, when an individual owns life insurance, the life insurance proceeds aren't necessarily income taxable, but they are part of the person's taxable estate for this figure. So, it's not hard to suddenly get into the millions when you throw a couple of million dollars of life insurance and some investments. Again, if it's a meaty, sizable business that has a nice net worth, it's not hard to go over these numbers.

Something too: the Biden administration has proposed eliminating the step-up in cost basis, which is probably a different separate podcast subject, but that's on the radar screen as well. I just bring that up because that's an issue that is faced when someone passes away.

How do the rules around transfer tax exemptions, or lifetime exemptions, fluctuate if you're looking at an individual versus a couple?

[Conrad] Really no fluctuation. That $11.58 million is per person. So, if you're married, you can basically double that. As a side note, when spouse one passes away first, there's no federal estate tax. There's no exemption issue when it comes to money going from one spouse to a surviving spouse. This is part of the planning where to take advantage of that deceased spouse's exemption, working with the family attorney is maybe that spouse's assets go into a trust to benefit the surviving spouse. That way, the deceased spouse actually uses their lifetime exception.

There is something called portability. That's kind of technical as well, and maybe another subject matter, but from a very basic 40,000-foot planning perspective – and, again, for the CPA that's listening to the podcast, there's some comments and terms here to be aware of in the conversation – making certain that both spouses get a chance to optimize their lifetime exclusion is what I'm trying to bring up.

But to your specific question, there isn't really any fluctuation. It's just that, for now, every individual gets to pass $11.58 million to the next generation or someone without paying any federal estate tax.

What options are available here in the area of gifting, whether it be to children, grandchildren, or other entities?

[Conrad] This is a great question, and really a great strategy or concept. For that couple, with this type of net worth, and they've done the number crunching and determined that, even with the charitable giving we want to do, we have more than enough to sustain our lifestyle, making gifts to the children or grandchildren, now you're basically taking a step backwards. You can give anybody $15,000 a year and not trigger any tax reporting or not even touching the lifetime exemption amount.

But say you gave me $30,000, well, that's over the 15, that $15,000, you file a tax return that says I'm using some of my lifetime exemption now. You let the IRS know. I think the big part of this strategy of giving some money now is the fact that you get the growth of that extra gift out of your estate. You don't have the estate continuously grow and grow and get bigger and subject to more and more tax. Maybe the child or the grandchild needs the money for something. That way, you get to enjoy them enjoying it while you're living, as opposed to them inheriting the money when you've passed away.

So having one of those bullet point items in your planning, and saying, "Maybe should we do some gifting now while we're alive?" I think there's so many positives to that.

These are really kind of tough, complicated decisions for people to be making on their own. How important is it in general for individuals to work with trusted advisers to help make these decisions? And if they have a CPA and they have a financial planner, and these are two separate people, how can these individuals better work together to best meet the client's needs?

[Conrad] As I mentioned earlier, the team is critical. People of this net worth oftentimes have a financial adviser beyond the CPA. If there's a business involved, there's a business attorney. They probably have a family attorney. It's not unusual that they have these professionals already. What sometimes unfortunately is unusual is that they're not talking together. To me, that working together, and, again, not a commercial for me as the certified financial planner, but the emphasis to the CPA that's listening, is bring the team together. Frankly, if the CPA brings me in, I let the CPA be the head coach of that team. If I bring the CPA in or the attorney, I tend to take the responsibility to make sure things are coordinated. We're looking at beneficiary designations and ownership structure and that sort of thing.

I can't emphasize enough having extra sets of eyes. Again, these types of clients typically already have these advisers in place, but they're typically not communicating together. If you, as the tax preparer, can be the one to put the hand up and say, "Hey, let's talk," you're the hero in your client's eyes. Again, I'm saying it for probably the fifth time, the team approach is usually the best client experience and the best client outcome.


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Podcast transcripts are provided as a summary of the conversation and have been lightly edited for the written medium. The transcript is not a verbatim representation of the interview.
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