Federal estate and gift tax mitigation is an important component for many high-net-worth and ultra-high-net-worth individuals’ tax and financial planning efforts. The federal estate and gift tax framework limits the value an individual can give to their family, during life or after death, without paying taxes. Following the enactment of the Tax Cuts and Jobs Act of 2017, the federal estate and gift tax exemption (i.e., the amount that can be transferred tax-free) increased to the then-historic level of $11.18 million per person, or $22.36 million per married couple. In 2021, the exemption has increased to $11.7 million per person, or $23.4 million per married couple. Any value transferred in excess of the exemption is subject to federal tax at the rate of 40%. Furthermore, ultra-low interest rates present prime opportunities to transfer assets in excess of the current exemption with minimal carrying expense. With proper planning, high-net-worth and ultra-high-net-worth individuals can eliminate or at a minimum mitigate and reduce their estate tax exposure and preserve generational wealth for their families.
Impending Changes to Planning Opportunities
The maximum benefits of these planning opportunities are only temporary, as many facets of the powerful wealth transfer tools currently available are expected to become less beneficial in the near future. First, the federal gift and estate tax exemptions are currently set to “sunset” back to approximately $5.5 million per individual effective January 1, 2026. Second, current proposals tied to the Biden Administration’s infrastructure proposals will likely decrease the efficacy of wealth transfer planning not implemented prior to legislative action. These proposals include the following material changes to federal tax law:
- Elimination of the step-up in basis
- Treatment of gifts and transfers of assets at death as taxable sales
- Reduced estate tax exemption of $3.5 million and reduced gift tax exemption of $1 million per person
- Increase in the federal estate and gift tax rate from 40% to a range from 45% to 65%
- Inclusion of growth held in pre-enactment irrevocable trusts in the grantor’s taxable estate
- Reduction of the annual exclusion from $15,000 to $10,000 per year per donee, and $20,000 per year per donor
- Significant limitations in the availability of valuation discounts for closely-held business interests
- Increase in capital gains tax rates to match ordinary income tax rates
- Increase in corporate tax rates
Summary
The current opportunities for wealth transfer planning are historically advantageous. However, as lawmaker discussions related to the infrastructure proposals progress, the window for taking advantage of these opportunities appears to be closing fast. The attorneys at Dvorak Law Group, LLC are extremely well-versed in the field of wealth transfer planning and would welcome the opportunity to discuss your unique planning needs and objectives.
If you have any questions regarding wealth transfer planning, or any other estate planning matter, please contact one of the attorneys in our Estate/Wealth Planning Practice Group.
This article is intended for informational purposes only and should not be construed as legal advice.
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