We are currently in an extremely generous estate and gift tax environment. The federal estate tax applies to transfers at death. The gift tax applies to transfers made while a person is living. There is also a generation-skipping transfer tax which is an additional tax on a transfer of assets that skips a generation. These taxes only apply to that portion of the estate on gift value that exceeds the exemption level.

A provision of the Tax Cuts and Jobs Act of 2017 more than doubled the estate and gift tax exemptions and raises it each year to keep pace with inflation. The current estate and gift tax exemptions for 2020 are $11,580,000 per individual or $23,160,000 per couple. These large exemptions give entrepreneurs and small business owners an opportunity to shield more of their assets from estate and gift taxes and, therefore, pass more wealth to the next generation.

However, today’s generous exemption amounts may not last. The current exemption threshold is set to expire in 2025 at which time the exemptions would revert back to the 2017 amount of $5,490,000 per individual, indexed for inflation. The flat tax rate on cumulative lifetime gifts and estate values in excess of that figure are scheduled to remain at its current 40%.

While the sunset provisions on the favorable exemptions are scheduled for 2025, the sunset could come sooner depending on the results of the elections. The favorable federal gift and estate tax laws may not survive past this year. With the federal deficits now much larger by the relief measures enacted to help the economy combat COVID-19, the reduction of the exemptions is a possible choice to raise more money. If the political winds change and exemptions are reduced, there will be a limited window between now and the end of the year to take advantage of the favorable exemptions.

So the question becomes, what is one who has substantial assets or businesses to do? Many individuals, entrepreneurs, and small business owners have not been taking advantage of their gift tax exemptions which reduces the size of their estate. This could be because people are not paying attention to it or, more likely, people do not want to give up control over their assets and businesses. Gifting appreciated assets is an excellent strategy to take advantage of the favorable exemptions but it is viewed as a loss of control. However, there are mechanisms that can be utilized such as reorganizing a business so that there are both voting and non-voting shares with the gifted shares being non-voting or held in trust. Favorable sales of appreciated assets can also be structured to family members as “part sale and part gift” transactions which can also help reduce the estate. For elderly individuals who are retired, with most of their assets being liquid, there should be consideration to moving assets to financially responsible adult children. However, there could be income tax ramifications that need to be examined and also there needs to be assurance that the elderly parent has the money they need to live comfortably for the remainder of their life.

Estate planning is always an inexact science and there are many factors that come into play depending on the family or business situation. For many families and businesses a change in the exemptions could mean substantially less for the next generation. There is an opportunity now which we know will be open at least until the end of 2020. What happens beyond 2020 is unpredictable. Now is a good time to talk to your estate planning and tax advisors to come up with a strategy to take advantage of the current favorable gift and estate tax environment.

Article submitted by: Richard S. Mairone, Esquire
Perskie Mairone Brog Barrera & Baylinson, P.C.