As we have highlighted in prior newsletters, the gift/estate tax exemption for all US taxpayers was doubled under the Tax Cuts and Jobs Act of 2017. The 2024 exemption is $13.61M per person, and the 2025 exemption is anticipated be $13.99M. This annual change is based on cost-of-living adjustments (COLA) added each year. However, the doubling of the exemption is a “bonus” that is scheduled to expire at the end of 2025, at which time it will be reduced by half. With projected COLA adjustments, it is anticipated this will result in a gift/estate tax exemption in 2026 of some $7+ million, assuming Congress does not change the law before then.
The current era of the bonus exemption is an ideal time for high net worth families to explore and implement estate tax planning strategies. While a taxpayer can transfer $13.61M free of gift/estate tax now, he or she will only be able to transfer approximately $7M in 2026. Think of it as a “use it, or lose it” proposition as to the $6.61M difference. Bear in mind the clock is ticking, and many wealth transfer techniques can take several months to implement.
At the outset, recognize that all of the estate planning strategies that utilize the bonus gift/estate exemption involve irrevocable gifts. Said another way, in order to use it, you must lose it (in favor of your family, often in trusts). Knowing tax laws are always in flux, you must determine that the tax strategy you are considering is prudent planning for your family, and not merely an efficient estate tax reduction tool. This assures that you will not regret the gift transaction, especially if the bonus exemption does not expire as expected.
The first step in the analysis is to determine the resources that you will need for the rest of your life. If your asset base exceeds your lifetime needs, the excess amount can be viewed as legacy money. Legacy money is ideal to transfer currently because by definition you will not need it. The next step is to analyze how best to structure the gift of your legacy money. While trusts are almost always the recipients of substantial gifts, you will need to determine who can benefit from the trust, who will act as trustee, and what the terms of the trust will be. Various tax attributes of the trust will need to be analyzed and considered as well.
Also, many families are candidates for more sophisticated structures, such as contributing assets to a family LLC or family limited partnership before making the gift. These entities provide many tax and non-tax benefits. For example, they allow consolidation of family assets for investment opportunities, insulation from the reach of divorce or other third parties, and favorable valuation discounts. Many families are most driven by the non-tax benefits, but it is worth noting that the transfer of assets based on the discounted entity value can provide a meaningful tax mitigation result. These entities do require time to establish and fund, so time is indeed of the essence with these strategies.
Farner & Perrin stands ready to assist you in wealth transfer planning to utilize your bonus exemption, and to optimize the design of trusts to receive these gifts. We can assist you in evaluating whether a family entity is right for your family, and in designing the proper structure. However, we caution in waiting too long into 2025 to initiate this project. There is no time like the present to begin.