Deadlines Loom for Estate Planning
By Mike Hoffman, Esq., CPA
Today, a married couple has over $23 million in combined gift and estate tax exemption between them. Just as important, and maybe more so for our clients in the long run, that same married couple has over $23 million in exemption from generation skipping transfer (GST) tax. This exemption applies to their trusts and looks past their children to grandchildren and approximately ten generations after that.
When President Trump took office in 2017, his new tax bill doubled the estate and gift tax exemption (and the GST tax exemption) from approximately $5 million to $10 million. With inflation, the exemption per individual is currently $11,580,000, or approximately $23 million per married couple (married couples can gift “jointly”, using both of their exemptions as part of their estate planning). This level is by far the highest the exemption has ever been. Historically, the exemption was approximately $60,000 in 1976, grew from $600,000 to $1 million under the Reagan administration, and grew to $5 million under George W. Bush. Meanwhile, the maximum estate tax rate, which is also the GST tax rate, was 77% in 1976, 55% under President Reagan, 35% under George W. Bush, and 40% under Obama. You probably saw the headlines, particularly during the Democratic Primary, where there is a political faction in this country that would like to increase the tax rates from 40% up to 70%, and decrease the exemption down to $3.5 million or even $1 million, depending on which audience the candidate happens to be talking to.
Regardless, the Trump change that doubled the exemption is scheduled to sunset back to $5 million ($10 million per married couple) at the end of 2025. With the current level of federal deficits exacerbated by the COVID-19 pandemic, there will be considerable pressure to allow the exemptions to return to their prior levels if not lowering them further.
The current presidential election will likely have a more immediate and significant effect on the level of the exemption, the tax rates, and the tools available to estate planners to minimize death taxes. For instance, if Joe Biden were elected President, and the Democrats controlled the House and Senate, tax legislation would result, and likely be retroactive to January 1, 2021. Therefore, if the exemption is reduced to $7 million per married couple (or less), that leaves only a few months for our clients to take advantage of the current $23 million in gift, estate and GST tax exemptions.
The IRS announced soon after the 2017 tax bill that they would not implement “clawback”, meaning that if these lofty levels of exemptions are used, they will not have to be “paid back” in any way if the exemptions are subsequently reduced. While the mechanics of this “no clawback” position have yet to be worked out, it allows us to do planning without looking over our shoulder. We are definitely in a “USE IT OR LOSE IT” situation.
We are currently working with most of our high net-worth clients trying to make the best use of this inflated exemption while it exists. There is room for all to consider a gifting strategy in 2020. For instance, if a married couple’s total exemption is reduced from $23 million down to $7 million, and their estates are either over $7 million now or potentially will be by the time the surviving spouse dies, a portion of their wealth will be exposed to an estate tax. Whether the rate is at 40% or 70%, the resulting estate tax will be confiscatory.
We have many tools and techniques available to reduce or eliminate potential estate tax liability. Most of our clients are interested in doing significant planning that saves estate taxes, avoids GST tax, creates significant income tax flexibility for future generations, protects assets from creditors and divorces for future generations, preserves family assets and avoids probate. Whether you are ‘ultra wealthy’ or ‘middle wealthy’, consider enhancing your estate planning with some significant gifting in 2020.
For more information regarding this or any other estate planning concern, please contact us at 404-255-7400 or info@hoffmanestatelaw.com.
