Hidden Estate Planning Advantage to This Year’s IRS Filing

This year’s tax filing season has some hidden advantages. Amidst a backdrop of the Covid-19 pandemic and current tax laws, the Internal Revenue Service has predicted over 160 million Americans could start filing their federal tax returns at the end of January 2022. In regards to gift returns, this does not appear to be as nearly as problematic. The challenges primarily involve individual returns. Among the various tax strategies that clients have been using this year include under-the-radar trusts. 

In 2021, donors could give up to $15,000 to another person like a friend or family member without this amount is subject to taxes. Each spouse in half of a married couple could utilize this limit to pass on assets to beneficiaries. Internal Revenue Service returns for many gifts over the threshold (As well as some under this threshold) are due on April 18, which is the same deadline that individual tax returns are due this year. Additionally, tax-payers can pursue an automatic six-month extension for both of these returns.

The Role of Annual Gifts

Remember, annual gifts do not factor into a taxpayer’s lifetime exemption from the 40% gift and estate tax. As a result, these exemptions are a preferred way to transfer assets out of an estate. In 2021, a person can pass $11.7 million to heirs without triggering the levy. Levels are poised to fall back to half this amount in 2026.  Gift taxes frequently work in conjunction with other strategic tax planning strategies. Various trusts are funded with gift money that ends up necessitating gift tax returns. 

At the end of 2021, the Internal Revenue Service had not yet processed 6.3 million individual returns and 2.3 million amended returns that are filed on paper and take much longer to process. Contributing to this backlog are reduced staff due to the pandemic as well as stimulus payments. A small number of people submit gift tax returns. Approximately 236,000 gift tax returns were filed in 2018. Most often gift tax returns are filed by the wealthy.

The Role of Beneficiary Defective Inheritance Trusts

A gift of $15,000 or less can be valuable to individuals with larger net worths, particularly when used in combination with a special trust. By passing on assets to a beneficiary defective inheritance trust, a donor can establish a path for an heir to guard millions of dollars of assets from tax law. Beneficiary defective inheritance trusts are a type of irrevocable trust that is established for children, grandchildren, or any other beneficiary and which permits a beneficiary to manage and utilize assets without causing the assets to be included in a person’s estate. Under existing tax law, these trusts can be funded with as much as $5,000 in cash and subsequently filled with assets that are projected to grow in value. A beneficiary then sells the shares to the trust in exchange for a promissory note under which the trust pledges to reimburse her. Promissory notes often feature “balloon” terms, which means that they are not repayable for 30 years. 

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