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Use It or Lose It? Gifting Considerations Before the November Election

Wed Sep 2, 2020 | Estate Planning |

Estate Planning, Regardless of Net Worth

Although the primary audience for this article is high net worth individuals (individuals whose assets are in excess of the estate/gift tax exemption amount) who may take advantage of sophisticated gifting strategies, estate planning is not just for the ultra-wealthy. Estate planning encompasses a wide variety of areas including tax planning, creditor protection, incapacity planning, asset management and charitable planning. There is no one-size-fits-all strategy that comprehensively addresses all estate planning goals and objectives. However, individuals who engage in proper planning are able to save their heirs significant time and expense regardless of which political party stays in power or takes control in November.

Current Tax Landscape

Now is an advantageous time to make gifts to children and more remote descendants to reduce estate tax exposure. The current federal estate, gift and generation skipping transfer tax exemptions (amounts individuals can transfer tax free during lifetime or at death) are $11.58 million per person ($23.16 million per married couple). These exemptions are at historic highs, and provide opportunities for significant lifetime gifting beyond the $15,000 per donee annual exclusion, educational and medical care gifts. Transfers during lifetime or at death in excess of the exemption amounts are currently taxed at a rate of 40%. Lifetime gifting can be effective strategy because it removes the future appreciation on transferred assets from a donor’s estate for estate tax purposes.

Future Tax Changes

The current historically high exemption amounts are merely temporary and are scheduled to be reduced to $5 million dollars per person, indexed to inflation, beginning in 2026. If these large exemptions are not used before such time, they will be lost. Due to the COVID-19 crisis, there is budgetary pressure at the federal level that could result in new legislation that reduces the applicable exemptions much sooner than 2026. Furthermore, the upcoming November election has drawn the attention of tax commentators to the risk that the current exemptions may be reduced, as Democrat party presidential nominee Joe Biden has proposed reducing these exemptions. These decreases could come as soon as January 1, 2021 if there is a change in control of the federal government in November.

Use of Strategic Gifting

Due to the uncertainty surrounding these exemptions, individuals should consider making use of the current high tax gift tax exemption as soon as possible. Although taxpayers cannot control the tax laws that will be in effect upon their death, strategic gifting prior to a change in the law could have significant benefits that reducing the overall tax liability faced by a wealthy taxpayer’s family. Gifting assets now, while the exemption levels remain at historic highs, allows taxpayers to “lock in” these high exemption amounts. The IRS has confirmed that if the exemptions are reduced in the future there will be no ‘clawback’ on gifts made using the exemptions in place at the time of the gift. Additionally, there are many sophisticated estate planning techniques that allow taxpayers to leverage this exemption using valuation discounts and other strategies, which are particularly effective in the current environment of low interest rates and falling asset values. Please contact any of the attorneys as Ellis Law Group to discuss applying these gifting concepts to your personal estate plan.