The current exemption from federal gift and estate tax is at an all-time high ($11.6 million per person), which you should utilize now, before the favorable opportunity is lost. This is a way to get more to your heirs, less to the IRS, relatively easily.
- This exemption is scheduled to “sunset” in 2025, although Joe Biden campaigned to reduce the estate exemption to $3.5 million, and the gift tax exemption to $1 million, as soon as 2021. In addition, the gift and estate tax rate could increase to 45%. Any changes to the law could be retroactive to January 1, 2021.
- The IRS has stated that it will not “claw back” gifts made today, if the exemption is reduced in the future.
- This is a “use it or lose opportunity”. The exemptions have never been higher. Once the law changes, you will be limited to a much lower exemption from gift and estate tax.
- Example: You own a family business worth $10 million. You gift it to your daughter in 2020. No gift tax is due. Instead, you gift it in 2021. Assuming a $1 million exemption and a gift tax rate of 45%, you would owe $4,050,000 in gift tax: $10 million gift – $1 million exemption = $9 million x 45% tax = $4,050,000 in tax due. Same business, same gift, new year, $4 million to the IRS.
- If you’ve already gifted assets up to $5 million, you can now gift $6 million more, tax-free.
- Consider making such gifts in trust, which could provide tax benefits, family governance and asset protection from creditors.
- If you own a family limited partnership (FLP) or LLC, you can use discounted gifting to leverage even more than $11.6 million out of your taxable estate. Like calls to lower the gift and estate tax exemptions, politicians looking for revenue have also called for repealing the discounts on closely held entities like LLCs and FLPs. The strategy is currently available, legal and effective.
- We have additional strategies to get assets to the next generation with fewer taxes: Grantor Retained Annuity Trusts (GRATs), Qualified Personal Residence Trusts (QPRTs), Charitable Remainder Trusts (CRUTs), Dynasty Trusts and others. These trusts can be used for estate tax minimization, capital gains tax minimization, family management and asset protection. Please see our article, here.
Please contact us for more information.