Don’t Lose Your Tax Exemption

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Scott Roberts, CPA, CLU

Director of Insurance Strategy


In March 2019, I wrote about how the Tax Cuts and Jobs Act of 2017 increased the estate & gift tax exemption significantly (currently $11.58 million per person) but is scheduled to drop back down again in 2026 (to an estimated $6.5 million per person) [].  At that time, conventional wisdom, and common sense, suggested that affected people should make plans to avail themselves of the higher exemption before it is reduced, by gifting assets.  That conventional wisdom, and common sense, has shifted in terms of timing as we look toward the upcoming election.  Should Joe Biden win, and especially if control of the House or Senate were to shift to the Democratic party, it is possible, and perhaps even likely, that the higher exemption will not survive until its expiration date of December 31, 2025.  In fact, the most extreme scenario involves a reduction of the exemption sometime during 2021 with a retroactive effective date to January 1, 2021.

Even when a reduction of the exemption is not looming, lifetime gifting makes economic sense for wealthy families as it transfers the future growth of gifted assets outside of the taxable estate, potentially saving millions of dollars in estate/gift taxes.  But it’s now more important than ever to assess whether gifting the full exemption soon is right for you.  Assuming the exemption is reduced by $5 million per person, that would equate to a married couple paying an additional $4 million+ in taxes if the higher exemption were not gifted prior to the reduction (5M X 2 = 10M X 40% = 4M plus future growth).

Previously, there was concern that these tax savings might be “clawed back” if the exemption were reduced in the future.  However, the IRS issued final regulations (T.D. 9884) in November 2019 providing that the benefit of the temporary increase in the gift and estate tax exemption would not be clawed back on the taxpayer’s subsequent death. From a practical standpoint, some clients are, understandably, reluctant to part with such a significant amount of their estate to save future estate taxes.  Fortunately, effective use of trusts in the gift/estate plan can address this issue.  Trusts for children and grandchildren can be controlled by a trusted person or trust company.  And married clients can create a trust for their spouse (or spouse and children) which could allow the spouse to be a beneficiary of the trust and, thus, still benefit from the gifted assets if need be.  This type of trust is commonly referred to as a Spousal Lifetime Access Trust (SLAT).

A comprehensive discussion of how to most effectively tailor a gifting transaction for specific clients is beyond the scope of this article.  Such an analysis should consider if and how to also allocate generation-skipping tax exemption, as well as how gifting assets in certain entity structures might result in a tax-favorable valuation discount.  So, I encourage clients who will be affected by a reduction in the exemption to start these discussions sooner rather than later as millions of dollars are at stake.

The views stated in this article are the opinion of the author and not necessarily the opinion of CWM, LLC. Information is based on sources believed to be reliable, however, their accuracy or completeness cannot be guaranteed. This article is not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor.

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