In a recent e-alert, we presented a summary of the potential impact of the election outcome on various areas of tax law. With the possibility of a shift of power in the White House, and the Senate from Republican to Democrat, we could see significant changes in tax laws implemented as early as next year.
In this follow-up e-alert, we will highlight some gift tax planning opportunities for individuals who may want to take action before the end of the year.
The current (2020) federal gift and estate tax lifetime exemption is $11.58 million per person or $23.16 million for a married couple. In addition, each individual can make annual gifts of up to $15,000 per person. Transfers made in excess of the lifetime exemption amount, whether during life or at death, are currently subject to a 40 percent federal tax. One significant potential tax law change is that the lifetime exemption amount could be significantly reduced, with most predictions being in the $3-5 million range per person or $6-10 million per married couple. This potential significant decrease in the lifetime exemption amount will bring many individuals and families back into the range of potential estate tax exposure. As a result, some individuals may want to take advantage of the current higher exemption amounts before they are potentially reduced.
There are several tax-planning techniques that take advantage of the current gift and estate tax lifetime exemption amounts — depending on the circumstances surrounding the transfer, the particular family dynamics, and the desired goal of the transferor or family members. Some individuals may want to make direct gifts to family members or charities, while some may prefer to utilize a legacy or dynasty trust to preserve wealth for younger generations and to have the benefit of spendthrift and creditor protection for the beneficiaries. Married individuals who want to make a completed gift for tax purposes (to use the current lifetime exemption amount) but do not want to lose complete access to the assets may prefer to set up a trust in which a spouse is a beneficiary of the trust. Also, certain trusts work very well in the current low-interest-rate environment to transfer appreciating assets to descendants, without incurring gift tax exposure.
One thing to keep in mind is that the lifetime exemption amount is applied from the bottom up, not from the top down. For instance, if an individual makes a $5 million gift, he or she will use $5 million of their $11.58 million lifetime exemption and have $6.58 million of exemption remaining.
However, if the lifetime exemption is subsequently reduced to $5 million, the individual will not have any exemption remaining. So, to take advantage of the current higher exemption amount, the individual donor must make gifts that use the entire exemption (or at least more than the projected potential lower exemption amount).
The potentially limited-time, wealth-transfer opportunities mentioned above have many pros and cons and may not be appropriate for every situation. We encourage you to contact us to set up a time to review your current documents, discuss any potential changes to your documents, and to discuss which estate planning strategies may be appropriate for you. It is important to act fast since some of these opportunities are time-sensitive and may not be available later in the year. We look forward to hearing from you.