Simple End of Year Tax Planning and Wealth Transfer Tips

by Mandy Hicks

Nathan VinsonBelieve it or not, the end of 2020 is quickly approaching (insert collective sigh of relief). While I think most of us are ready to start looking forward to 2021 and would prefer to not even have to utter the words 2020 anymore, now is the time to finish off the year strong by reviewing simple, yet important, year-end tax planning and wealth transfer tips.

When most people think of tax planning and wealth transfer, they may have in mind complex estate planning documents and an overload of legal and accounting advice.  But that doesn’t have to be the case.  Here are three simple tips that you can implement with relative ease, though you will want to consult your tax advisor first.

1. The Annual Gift Tax Exclusion. The simplest tax planning and wealth transfer technique involves the all-too-familiar annual gift tax exclusion.  The annual gift tax exclusion is an amount that a person may give to another person without having to file a gift tax return or otherwise report to the IRS.  The current exclusion is $15,000 per person receiving the gift.  The exclusion is indexed for inflation, but it may only increase in $1,000 increments.  Further, married taxpayers may elect “gift-splitting,” which basically doubles the amount of the gift that they may make to one person using the gift tax exclusion; for each person receiving the gift, the limitation would be $30,000 rather than $15,000.  For example, if a married couple has two children and four grandchildren, they can give up to $30,000 to each of these people tax-free and without having to report it to the IRS.  Therefore, the married couple may transfer $180,000 total to the children and grandchildren.  Going further, if the children are also married, the taxpayers may give an additional $30,000 to each child’s spouse, which may be desirable if the child and the spouse hold a joint checking or investment account.  Note, however, that a gift tax return would need to be filed if the taxpayers elect gift-splitting.  The gifts are not taxable at all, but the IRS would like to know that the $30,000 was gifted via gift-splitting.

2. 529 Plan. Don’t think it’s a good idea to give a minor $15,000 to $30,000 outright?  A 529 Plan is a great tool to invest in a child’s or grandchild’s future education.  In its simplest form, a 529 Plan allows a donor to transfer $15,000 ($30,000 for married couples) free of gift tax to an investment plan for the purpose of the donee’s future education.  These plans were traditionally only available for post-secondary education, but they were expanded in 2017 to cover K-12 education and again in 2019 to cover apprenticeship programs.  The money grows tax-deferred in the plan, and withdraws are tax-free if used for qualified education expenses.  Further, to allow for greater investment growth, a donor can transfer $75,000 to a plan now and elect to have such transfer treated as if it were made pro rata over a five-year period (i.e. $15,000 each year).  That’s $150,000 per donee for married couples!

3. Pay Tuition Directly to the School. Don’t have $75,000 (or $150,000) lying around for all of your children and grandchildren? For the vast majority of us, maxing out a 529 Plan is just not practical, although you can contribute any lesser amount to such plan that you want; it does not have to be the maximum annual gift tax exclusion amount.  Alternatively, you can choose to pay tuition on behalf of your loved one directly to the institution.  The payment does not count against your $15,000 annual gift tax exclusion, yet it has the effect of reducing your taxable estate.  Note that this rule also applies to paying medical expenses on behalf of a donee directly to the medical provider.

While ELPO Law can certainly help you with simple to complex (and anywhere in between) estate planning needs, we also want to stress the importance of your knowledge on these matters as well. Taxes, wealth transfer, estate planning, and the law can get very complicated and confusing very quick…. but don’t fear. We are here to help. Our team has the experience and knowledge to help make sure you are making the right choices to protect you and your families. Please feel free to call us anytime to discuss further: 270-781-6500.