“Maybe not tomorrow, but the sunset of our historically high estate tax exemptions is coming—and with the election on its way, it could be sooner than you think.”
In 2018, the Tax Cuts and Jobs Act (TCJA) doubled the lifetime gift, estate and generation-skipping tax exemption to $11.18 million from $5.6 million. With adjustments for inflation, that exemption in 2020 is $11.58 million, the highest it’s ever been, reports the article “Federal Estate Tax Exemption Is Set to Expire—Are You Prepared?” from Kiplinger. However, this won’t last forever.
There’s a timeline for this historically high exemption. The window for planning may be closing soon. The law is set to sunset at the end of 2025, but the impact of a global pandemic and the upcoming presidential election will likely accelerate the rollback.
As of this writing, many states have already eliminated their state estate taxes, although 17 states, including New York, still have them. The estate planning environment has changed greatly over the last decade. However, for families with large assets, and for those whose assets may reach Biden’s proposed and far lower estate tax exemption, the time to plan is now.
Gifting Assets Now to Reduce Estate Taxes. The IRS has stated that there will be no claw back on lifetime gifts, so any gifts made under the current exemption will not be subject to estate taxes in the future, even if the exemption is reduced.
Keep in mind that when gifting assets, to make a gift complete for tax purposes, you must relinquish ownership, control and use of the assets. If that is a concern, married couples can use the Spousal Lifetime Access Trust or SLAT option: an irrevocable trust created by one spouse for the benefit of the other. Just be mindful when funding irrevocable trusts. This may impact future capital gain tax if these assets have low cost basis values and have appreciated. If the trust holds assets that have appreciated for extended periods of time, beneficiaries could be hit with capital gain tax burdens when they are sold.
Take Advantage of Lower Valuations and Low Interest Rates. The value of many securities and businesses have been impacted and devalued during the pandemic. This could be a good time to consider gifting or transferring assets out of your estate while the values are lower. Lower valuations allow a greater portion of assets to be transferred out of the estate lifetime tax exemptions, thereby reducing the future size of the taxable estate assets while preserving a higher exemption amount.
With interest rates at historical lows, intra-family loans may be an effective wealth-transfer strategy, letting family members make loans to each other without triggering gift taxes. Intra-family loans use the IRS’ Applicable Federal Rate–now at a record low of between 0.14%-1.12%, depending upon the length of the loan. These loans work best when borrowed funds are invested and the rate of return earned on the invested loan proceeds exceeds the loan interest rate.
Avoid Last-Minute Rush by Starting Now. This type of estate planning takes time. The more time you have to plan with your estate planning attorney, the less likely you are to run into challenges and hurdles that can waste valuable time. When estate tax laws change, estate planning attorneys get busy. Creating a thoughtful plan now may also help prevent mistakes, including triggering the reciprocal trust doctrine or the step transaction doctrine. Planning for asset protection and distribution allows families to control how assets are distributed for many generations and to create a lasting legacy. Give us a call today at 718-238-6960 to plain for your asset protection and distribution.
Reference: Kiplinger (Oct. 14, 2020) “Federal Estate Tax Exemption Is Set to Expire—Are You Prepared?”