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Don’t Miss the Boat on Gifting and Estate Tax Exemptions

Don’t Miss the Boat on Gifting and Estate Tax Exemptions

In December 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), creating a significant but temporary opportunity for high-net-worth individuals to transfer a portion of their wealth to heirs free of gift and estate tax. The act included a provision to increase the federal gift and estate tax exclusion from $5.45M to what has now grown through annual inflation adjustment to $11.58M for an individual or $23.16M for a married couple in 2020.1 When this exemption sunsets on December 31, 2025, the amount is slated to revert back to $5M per person with annual indexing for inflation.

Given this timeframe, individuals may understandably assume that it is safe until the end of 2025 to complete their gifting. But could that reversion be hastened? The current Democrat-led House has already expressed a desire to amend the tax code to reduce this exemption amount and several bills related to the subject have already been proposed, including the acceleration of the expiration date. Given the fact that we do not know the outcome of the upcoming elections, how long this opportunity will remain is uncertain. Therefore, if you are in a position to take advantage of this window now while it is open, you should strongly consider doing so or risk forfeiting what could be a once-in-a-lifetime chance to minimize the size of your taxable estate.

What factors should you consider prior to transferring a significant amount to others? Your first step when analyzing any gift is to confirm that your remaining assets are sufficient to sustain the lifestyle you hope to maintain until your last day. Be sure to work with your Wealth Manager to create a reasonable projection of how your assets will be used to accommodate not only regular expenses plus inflation over time, but costs for care as you age. These may not be a part of your current spending plan.

If you are an entrepreneur who has successfully created a business that is now in its early stages, you have the potential to transfer not only a stake in your business but also any appreciation associated with those shares to the next generation. This could be instrumental in getting a potentially massive asset out of your estate with minimal gift tax consequences. Be mindful of any loss of control when gifting shares in a business to ensure that your pursuit of effective estate planning is compatible with your vision for the future of your company.

Perhaps you want to take advantage of the current increased gift amount but are uncertain about exactly how much each of your beneficiaries should receive. Why not consider creating a sprinkling trust? Typically, a trust is created with clearly stated language as to how and when beneficiaries are to receive distributions. With a sprinkling (or spray) trust, the grantor provides the trustee with discretion to distribute income and principal among a group of beneficiaries based on the individual’s needs. Because the trustee is granted broad powers, select wisely so that you are confident this person’s views align with your vision when determining the basis for distributions. In order for this to be considered a completed gift, you will not be able to retain any legally binding ability to control the trustee’s actions; however, you may make your wishes known to the trustee on occasion. If the trust is funded before the provision of the TCJA expires, you will have succeeded in transferring assets out of your taxable estate without having to make gifts to the named beneficiaries.

This opportunity could vanish as soon as January 1, 2021 if a new Congress enacts tax law that scales back the benefits of TCJA, so act now to schedule appointments with your Wealth Manager and your estate planning attorney to review your goals. They will offer guidance on how to create a plan tailored to your specific circumstances. And, if you have used some of your lifetime exemption over the years, remember to check with your CPA or review your latest gift tax return so you know how much remains available to gift.


1 – www.irs.gov

Articles and Commentary Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.  
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