How Urgent is 2025 Exemption Gifting?
As a result of the 2017 Tax Cuts and Job Act, an individual’s exemption from gift, estate and generation skipping transfer tax has now reached approximately $14M dollars. For our married clients, that reaches nearly $28M dollars. These totals represent the amount of property that can be gifted from your estate(s) before the confiscatory federal estate tax applies, which is currently at 40%.
The exemption increase under the 2017 Act is set to sunset at the end of this year, and the total exemptions would be halved to approximately $7M dollars per individual. Therefore, there is a sense of “use it or lose it” coming from tax, financial, and legal advisors. Those who can afford to take advantage of gifting strategies for any potential sunset should do it now rather than continuing to kick the can down the road. For the super wealthy, this is a no brainer.
For ultra-high-net-worth clients with wealth between $20M to $50M, this may become more strategic and less straight forward. Some clients have embraced the strategy of using one spouse’s entire exemption, leaving the other spouse’s exemption available. If the exemption amount is halved because future tax legislation does not intercede, at least the client’s family will have some remaining exemption moving forward.
Other strategies that have become popular include having one spouse gift to a dynasty family trust which includes the other spouse as a beneficiary. These are often referred to Spousal Lifetime Access Trusts (SLATs).
The structure of a family trust has endless variations. We traditionally use grantor trusts, which often allow the grantor to have continued administrative control (or grantor’s spouse in the case of a SLAT), beneficiary control for future descendant’s trusts (beneficiary controlled trusts, BCT), and build in considerable flexibility through the use of trust protectors, powers of appointment, flexibility for fiduciary changes, separation and merger provisions, and directions to change situs and governing law.
A final thought about 2025 exemption gifting has to do with valuation planning. The most attractive asset to an estate planner for gifting is a “hard-to-value” asset, such as real estate or an interest in a closely-held business. When these types of assets are gifted, or, in many cases, partial interests in hard-to-value assets are gifted to a family trust, numerous factors affect the valuation of those gifted assets. Appraisers will determine fair market value by starting with liquidation value of the entire asset. Reality, and sound valuation principals, require discounts pertaining to many areas such as lack of control over the asset being transferred to the trust (e.g., minority interest discount), lack of marketability, and the tax gain that is built-up within the property being transferred.
Our tax law allows us to consider the appropriateness of these valuation discounts in making judicious use of our tax exemptions. This might not always be the case in the future. The IRS and Congress have considered limiting the use of valuation discounts in certain types of gifting and sale transactions being implemented for estate planning purposes. In other words, the IRS would like to require the use of full liquidation value and not permit the use of valuation discounts.
Therefore, it is not only the potential halving of the gift, estate, and generation skipping transfer tax exemptions we worry about, but also the effect of possible future tax legislation on other popular planning techniques. These techniques include the curtailing of the use of valuation discounts discussed above and limitations on duration and tax effectiveness of family trusts drafted in the future (that would not enjoy the security and effectiveness of dynasty trusts that have been grandfathered from the effect of any future hindering legislation).
So, the panic of “use it or lose it” may somewhat abate if 2025 tax legislation prevents the exemption sunset. However, there are numerous other considerations that encourage us to take advantage of the opportunity for planning that will be essential to maximize tax savings and asset protection for descendants, their spouses, and themselves in response to future tax laws and their circumstances. Now is the time!
