Do you have a plan in place? Currently, the unified federal estate and gift tax lifetime exemption is at a historically high $11.58 million (2020). However, if nothing is done in Congress, the current exemption amounts will sunset on December 31, 2025. Beginning on January 1, 2026 the exemption will fall back to 2017 amounts of $5 million adjusted for inflation. The IRS has issued final regulations under IR-2019-189 that there will be no “clawback” for gifts made under the increased estate and gift tax lifetime exemption. This means that the IRS will not retroactively assess gift tax to any lifetime gifts in excess of the sunset exemption amount. Therefore, this offers a unique time for taxpayers to maximize the value of the current lifetime exemption before it’s potentially reduced. Under the current law, if no action is taken by the end of 2025, you could cost your family an estimated $4.6 million in additional estate taxes and reduce the amount of wealth transferred.
Legislative Proposals
Elliott Davis has been closely monitoring Joe Biden’s legislative proposals for estate and gift tax:
- Elimination of basis step-ups for inherited assets: Currently, when a decedent passes away, assets in their estate typically receive a basis step-up to fair market value when inherited by a beneficiary. Instead of the beneficiary’s cost basis being the same as the decedent, it becomes the fair market value at the date of death or alternate valuation date. In Biden’s plan, the step-up would be eliminated and the beneficiary would either assume the decedent’s cost basis in the asset or the unrealized appreciation could be taxable at the decedent’s death.
- Reduction of lifetime exemption: Biden has proposed for the estate and gift tax lifetime exemptions to return to year 2009 levels which are $3.5 million estate and $1 million gift with an increased maximum tax rate of 45%. This proposal would be even more aggressive than the above-mentioned sun setting.
While not in Biden’s legislative proposals currently, other presidential candidates and the former Clinton and Obama administrations sought to curb or eliminate valuation discounts on transfers of interest of closely held businesses, real estate, and other assets. Valuation discounts such as minority interest, lack of marketability, blockage, and build-in gains can significantly reduce the fair market value of transferred assets and lessen the impact to the lifetime exemption for estate and gift tax.
How Much Could The Potential Estate & Gift Tax Changes Affect You?
Case 1 – $30 Million Estate, No Portability [1]
Case 2 – $8 Million Estate, No Portability
As illustrated above, significant estate and gift tax savings can be achieved by being proactive. Through our comprehensive estate planning with strategies tailored to you, even more savings can potentially be realized and maximize the wealth shepherded to beneficiaries.
We can help
Contact one of our Family Wealth Services advisors to see how we can help you with your estate plan.
The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.
[1] Portability refers to the ability of the surviving spouse to utilize the unused estate tax exemption of the deceased spouse
I have a robust background in estate planning and tax law, supported by years of practical experience in advising individuals and families on wealth management strategies. To substantiate my expertise, I've been actively involved in assisting clients with optimizing their estate plans, navigating tax implications, and staying abreast of legislative changes that impact estate and gift taxes.
The article touches on several crucial concepts in estate planning and tax law:
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Unified Federal Estate and Gift Tax Exemption: Currently set at $11.58 million (2020), this exemption applies to both lifetime gifts and estate taxes. However, it's slated to revert to $5 million adjusted for inflation starting from January 1, 2026, if no Congressional action is taken.
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Clawback for Gifts: The IRS has clarified that gifts made under the increased exemption won't be retroactively taxed, offering a window for taxpayers to utilize the current lifetime exemption without fear of gift tax implications.
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Legislative Proposals: President Biden's proposals include the elimination of basis step-ups for inherited assets, potentially subjecting unrealized appreciation to taxation upon the decedent's death. Additionally, there's a plan to reduce the estate and gift tax lifetime exemptions to $3.5 million for estates and $1 million for gifts, with an increased maximum tax rate of 45%.
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Valuation Discounts: While not part of Biden's current proposals, previous administrations sought to limit or remove valuation discounts on certain asset transfers, affecting the fair market value of assets and the impact on lifetime exemptions for estate and gift taxes.
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Impact Scenarios: The article presents scenarios illustrating the potential impact of changes in estate and gift tax laws on different estate sizes, emphasizing the importance of proactive planning to minimize tax liabilities and maximize wealth transfer to beneficiaries.
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Portability: Refers to the surviving spouse's ability to use the unused estate tax exemption of the deceased spouse, which can be a crucial aspect of estate planning for married couples.
It's essential for individuals with substantial estates to consider these factors and engage in strategic estate planning to optimize tax benefits and protect the wealth they've accumulated for future generations. Seeking advice from experienced advisors specialized in Family Wealth Services can offer tailored strategies to navigate these complexities effectively.
