Tax Planning for 2021

As 2020 draws to a close and a new year dawns, we need to think of…tax planning! Some years Congress tweaks the laws more than other years. While 2020 held plenty of surprises with coronavirus and an election, it was a relatively quiet year for legislative changes. Still, even in a quiet year, some things change due to inflation increases, etc.

Estate Tax Planning

Applicable Exclusion rises from $11.58 million in 2020 to $11.7 million in 2021.

GST Exemption rises from $11.58 million in 2020 to $11.7 million in 2021.

Annual Exclusion for present interest gifts remains at $15,000.

Annual Exclusion for gifts to a Noncitizen Spouse rises to $159,000 in 2021.

In a few years, at the end of 2025, the Applicable Exclusion and the GST Exemption will revert to one-half of their current levels, in other words to $5 million, adjusted for inflation from the 2011 base year. This isn’t relevant for most Americans. However, if you have well over these amounts, you may want to consider removing these amounts from your estate while you still have the Exclusion and Exemption to cover the transfers. You still have a few years before the law is set to change, unless Congress changes things dramatically before then.

Income Tax Planning

Standard deduction amount:

Married, filing jointly, increases from $24,800 in 2020 to $25,100 in 2021

Single, increases from $12,400 in 2020 to $12,550 in 2021

Head of household, increases from $18,650 in 2020 to $18,800 in 2021

State and Local Tax (SALT) deduction cap remains at $10,000 in 2021

The income tax brackets also creep slightly higher, as well.

As you plan for 2021, remember to keep your receipts for expenses and charitable contributions. With the high standard deduction amount and the cap on State and Local Tax deductions remaining at $10,000, fewer taxpayers are itemizing. In fact, the percentage of taxpayers itemizing is less than half what it was before the Tax Cuts and Jobs Act of 2017. Now, less than 14% of taxpayers are expected to itemize. Before then, over 31% of taxpayers itemized. If you give to charity, you may want to group your charitable contributions into one year and itemize them in that one year. You can do this by giving to a donor-advised fund in one year. Then you can make grant recommendations from your donor-advised fund each year. This way, your tax planning won’t impact your favorite charities.

Let’s look at an example. John and Mary make $14,000 of charitable contributions to their church or alma mater each year. They have state and local tax deductions above the $10,000 limit. They have a total of $24,000 of deductions and they’d be better off taking the standard deduction ($25,100 in 2021). Rather than giving $14,000 for each of three years to charity, they could give 3 x $14,000 ($42,000) in one year and they’d get a much better tax result. If they gave $42,000 in year 1 to a donor-advised fund, combined with their SALT deduction of $10,000, they’d have $52,000 of deductions instead of the standard deduction of $25,100. In years 2 and 3, they’d just have the SALT deduction of $10,000 and no charitable deduction but could still take the standard deduction ($25,100 in 2021). The charities would get their funds each year just as usual. John and Mary would get a much better tax result. In year 1, they’d have $52,000 of deductions instead of $25,100, an increase of $26,900. Their deductions in years 2 and 3 would not change. If John and Mary are in the highest income tax bracket, this increased deduction could save them nearly $10,000 in taxes.

A little planning can produce a much better tax result. Have a happy, healthy, and prosperous 2021!

Updating Your Plan: Beneficiary Designations

A beneficiary designation instructs where the asset goes upon your death. Some important assets which transfer by beneficiary designation are IRAs, 401(k)s, and life insurance. These assets could be a large part of your overall assets, so it’s important to make sure those beneficiary designations complement your overall estate plan. These designations control the disposition of the asset, notwithstanding the fact that your Will or Trust has terms that conflict with it. For example, let’s say your Will or Trust leaves everything to your two children. However, you have an asset, like an IRA, which designates your mother as the beneficiary. Perhaps the designation predates the birth of your children. In that scenario, your IRA would go to your mother and not to your two children. That’s why it’s important to check beneficiary designations on assets that have them.

Many other assets, such as a bank account or a brokerage account could have a “POD” (Pay on Death) or “TOD” (Transfer on Death) designation. Like a beneficiary designation, a POD or TOD designation supersedes the instructions which you’ve laid out in the rest of your estate plan, such as in your Will or Trust.

There’s nothing inherently wrong with TOD, POD, or beneficiary designations. When used properly, they can be a simple, effective part of your overall plan. However, it’s important to coordinate your entire estate plan and consider the impact of each part on the other.

It’s easy for a plan to become inconsistent with your wishes when you use beneficiary designations, TOD, or POD because the designations are fixed even as asset values change. For example, let’s say Mary intends to leave her assets to her three children equally. Mary has a small brokerage account with a POD to one of her children, Betty. Mary doesn’t think anything of this, because there’s language in her Trust which considers what Betty receives from the brokerage account. However, when the brokerage account going to Betty skyrockets in value, Mary’s Trust can no longer make sufficient adjustments because it doesn’t control sufficient assets to balance out the brokerage account going directly to Betty.

However you choose to leave your assets, it’s important you consider changes in your wishes, changes in asset values, etc. If you want your wishes carried out, it’s important to keep your entire plan up-to-date and consider how changes in asset values might have a substantial impact on your plan.

Updating Your Plan: Your Trust or Will

Every state has laws controlling what happens to your assets if you die owning them in your name and don’t leave instructions indicating what you want to happen to those assets. Those laws are called “intestate succession” laws. While they are designed to cover what people will want generally, they often aren’t what you want to happen in your precise situation. For example, state law might leave the assets equally to your children outright. You may prefer unequal shares for your children due to your situation. Also, you may prefer to have the assets held in trust. For example, a beneficiary might have special needs and an outright distribution could deprive them of needs-based benefits. A will is how you leave instructions to override the intestate succession laws. If you have assets in your name at death, they will be subject to probate and will be controlled by your will, if it exists, or intestate succession.

However, you can have your assets owned by a revocable trust. If you do that, your assets won’t be in your name at death and they won’t have to go through the probate process. The probate process may be more or less expensive and time-consuming depending upon the jurisdiction. But, it’s almost always a public process. A revocable trust allows for streamlined management of your assets. While you’re alive and well, typically you’d be the trustee, in other words, the person managing those assets. Upon your incapacity, the person you’ve chosen as your successor trustee would step into that role. This incapacity protection can be invaluable. It’s much easier than if you don’t have a trust holding your assets.

Whether you’ve chosen a will or a trust as the engine of your estate plan, it’s important to re-examine your plan periodically to be sure it’s doing what you want. Are you comfortable with the successor trustees who would take over in the event of your incapacity? Are you comfortable with who would get your money, when, and how?

Many things can happen in the course of a year. This is especially true in a year like this one! It’s good to take a look at your plan and make sure it’s still consistent with your wishes.

Updating Your Plan: Powers of Attorney

This is the first in a two-part series of articles on updating your plan. This first article examines the importance of updating Powers of Attorney, both Financial and Medical. The second part of the series looks at the importance of updating your primary estate planning documents, such as your Trust or Will. Together, these documents are the keystone in even the most basic estate plan and it’s important to keep them up-to-date.

First, what’s a Power of Attorney? It’s a document by which you appoint someone as your “Agent” to act on your behalf. If that Agent is unwilling or unable to act, the document can appoint one or more successor Agents. In other words, you give someone else (the Agent) powers you inherently already have yourself. With a Financial Power of Attorney, otherwise known as a General Durable Power of Attorney, you appoint your Agent to make financial decisions for you. The Power could be drafted to be “immediate.” In other words, the Agent would have the power to make decisions regarding your financial assets right away and without regard to your ability to make those decisions for yourself. In most states, you could make the Power “springing,” in other words it would only become effective upon your not being able to act for yourself because of incapacity. A Power of Attorney is “durable” if it continues notwithstanding you having incapacity. A Power of Attorney which is not durable would not allow your Agent to act during your incapacity.

A Healthcare Power of Attorney appoints an agent to make medical decisions for you when you are unable to do so for yourself. A HIPAA Power appoints an agent t to access protected health information.

It’s important to keep your Powers of Attorney up-to-date so that you have the people you want as your agents. Every year around the holidays, it’s a good idea to look at your Powers of Attorney just to check if they name the people you’d want as your agents. Maybe one of your agents is no longer appropriate. Maybe the person whom you’d named as an agent is now too old or too frail to be your agent. Maybe you have someone else you’d prefer as an agent. Perhaps one of your children is now an adult and you’d want to serve as your agent instead.

The agents you select under your Powers of Attorney are vital to your incapacity plan. Make sure you keep the right people in those roles.