How will people remember you? This is a question many executives ask themselves as they put in countless hours during their working years, and it becomes ever more relevant in their work-optional years.
Estate planning is an essential part of an executive’s wealth management strategy both while you are here on this earth and when your legacy outlives you. As a wealth manager to executives and their families, I am frequently asked about estate planning and how it fits into an overall financial plan. Whether you are at the working-hard stage in your life or are at the point where work is optional, you need to consider how your assets will be treated as part of your estate. This can be accomplished by better understanding tax strategies for high income earners.
I always recommend my clients work with a trusted estate planning attorney, in conjunction with an experienced executive financial advisor. Estate planning is a pillar of the financial industry, and not many changes occur in the tax code year after year. This year, however, there are multiple changes that make tax strategies for high income earners in 2018 and 2019 important to take into account. A better understanding of these tax changes and strategies associated with them can have a profound impact on your estate.
How 2018 Tax Laws Will Impact Estate Planning Tax Strategies for High Income Earners
Each morning, as you start your day with a cup of coffee and the news, you are likely to catch some of the rumblings around the Tax Cuts and Jobs Act (TCJA). Apparently, both Democrats and Republicans can agree that leaving money to your family is a good thing, and this is evident in this new tax law. The law raises the federal estate and gift tax threshold to allow individuals to leave more money to their families tax free.
These tax laws will especially affect high-level executives when it comes to your estate planning strategies. Below, I highlight the specific changes that are pertinent to your financial situation. My recommendation is that you educate yourself, and then speak with your trusted wealth manager about the best estate planning tax strategies for high income earners in 2018 and 2019.
The Federal Estate and Gift Tax—and Its Impact on Estates
The changes to the new tax law that will most impact you as an executive relate to the federal estate and gift tax. The TCJA now allows for a maximum of $11.2 million to be transferred from one person to another during their life or at the time of their death, tax free. This amount is doubled for a married couple, putting the number at $22.4 million tax free.
Prior to the TCJA, the amount of money exempt from estate and gift tax for an individual was $5.6 million. Now that this amount has doubled, it gives individuals more freedom to strategically invest according to their financial goals without having to worry about taxable liabilities—but only up to the total exemption amount. It also eliminates the need for executives to require separate trusts or money to be tied up in life insurance policies due to their favorable tax position. As always, I would recommend that you consult a seasoned estate planning attorney to decide what would be most advantageous to you and your family’s financial situation.
The good news is that this change to the tax law is slated to last through the year 2025, which gives you and your executive financial advisor time to plan and develop a strategy to leverage this new tax law.
Strategies to Leverage the New Estate and Gift Tax Levels When Planning Your Estate
There are a few different strategies that can help you address the new estate and gift tax levels, which include:
- Gift holdings or interests in companies or partnerships.
- Use the new federal annual gift tax exclusion (in addition to the new tax shelter amount).
- Contribute more cash to charities.
Gift Holdings or Other Interests
One of the ways to leverage the TCJA is to consider gifting some or all of your holdings in companies and partnerships outside of your current company. As an executive, most companies will expect you to hold a certain amount or percentage of company stock. If you are still holding on to other interests without the need for the extra income, though, it might be a good time to consider gifting those during your lifetime to take advantage of the increased tax shelter amount.
In working with executives over the years, I have found that they tend to hold on to interests or partnerships for no other reason than that they are too busy to consider liquidating them. I would advise that now is the time to consider gifting them to lower the overall size of your estate.
Use the Annual Federal Gift Tax Exclusion
Another interesting change that doesn’t come directly from the TCJA but that is tied to it is the increased amount for the annual federal gift tax exclusion. The major benefit of this exclusion for executives is that it is not considered part of the lifetime tax shelter amount of $11.2 million single or $22.4 million for married couples.
The annual federal gift tax exclusion has been bumped up from $14,000 per person to $15,000 per person, or $30,000 for couples to donate to an individual tax free. While this amount might not seem like a large financial impact on your estate, if you have multiple people you would like to donate to on an ongoing, annual basis, the numbers can certainly add up over the years and benefit both you and the people you are gifting to. Consider gifting money annually to take advantage of this gift tax exclusion, which will help you lower your overall estate as well.
Donate Cash to Charities
Last, but certainly not least, you can expand your charitable gifting in 2018 and 2019 and deduct more on your taxes. Beginning in 2018, you will be able to deduct up to 60 percent of your adjusted gross income for charitable donations you make to public charities, private operating foundations, and private foundations that qualify. This is certainly exciting news for executives who have a heart for humanitarian work. The increase from 50 percent of adjusted gross income to 60 percent is a welcomed change for those high income earners.
These tax strategies for high income earners in 2018 and 2019 are not all-encompassing, as you will want to address your individual estate with your trusted wealth manager or executive financial advisor. However, they should give you a starting point to build from while working with your estate planning attorney in conjunction with your wealth manager. If you can effectively leverage the new TCJA by integrating some of these strategies into your financial plan, you can help yourself and your family leave a legacy during your lifetime and beyond it.
K. Wade Carpenter, CFP®, AIF®, ChFC®, CLU®, is an innovative wealth manager serving corporate executives and entrepreneurs from coast to coast. Throughout his more than 25-year career, Wade’s focus on C-level clients has made him a top strategist for integrated asset allocation and equity compensation management. He can provide expert guidance on multiple tax strategies for high income earners to implement in 2018 and 2019. For more information on how Wade and the Carpenter Team can advise you on your estate planning strategies, reach out today for a complimentary consultation.
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