As the 2020 Election approaches, a renewed focus has been placed on the importance of reviewing estate and gift plans prior to year-end.
As part of the 2017 Tax Cuts and Jobs Act (TCJA), the estate and gift and generation-skipping transfer (GST) tax exemption was doubled from $5 million to $10 million (with annual indexes for inflation, currently $11.58 million) per person. This increased exemption is currently set to revert to $5 million (indexed for inflation) beginning in 2026.
However, it is possible that this increased exemption will be repealed as part of former Vice President Joe Biden’s tax plan should he win the presidential election, with a possible effective date as early as January 1, 2021. While the exact lower estate exemption and timing are unknown, this presents individuals with a prudent planning opportunity to explore making large gifts prior to year-end to utilize the increased exemption before it is repealed. To benefit from the increased exemption, current gifts would need to exceed the future lower exemption amount. The IRS has recently confirmed that they will not “claw back” any large gifts made under the TCJA’s increased exemption should the exemption revert back to pre-TJCA levels, conveying that this is indeed a use-it-or-lose-it opportunity.
In addition to possibly facing a lower lifetime exemption, there is speculation that the step-up in basis, valuation discounts, GRATS, and Grantor Trusts may be eliminated as well. Interest rates are also historically low, which allows for more gift flexibility. These can be powerful tools in transferring assets and future appreciation out of your estate while keeping the value of the gift as low as possible. Some states also apply estate and inheritance taxes and have a lower estate exemptions. Gifting may also help individuals avoid state-level taxes on the value of the estate assets altogether.
Gifts can be made to trusts (GRATS, SLATS, IDGTs, DAPs, QTIP, etc.) or directly to friends and family members. For those who are hesitant about making large gifts, there are trusts available where taxpayers can utilize the increased exemption, transfer assets out of their estates, and still retain access to the income or cash flow of the trust should they need it in the future.
Completed gifts can take many forms and utilizing the right strategy for your situation is extremely important. We highly recommend that individuals contact their accountants and estate planning attorneys as soon as possible to discuss their situations and determine whether gifting is the right move for them to make. With all the uncertainty and projected volume increase in gifting ahead of year-end, estate and trust attorneys and public accountants’ work schedules will likely be booked up through the end of the year.
Individuals who have questions regarding the information noted above should contact their E. Cohen advisor or call us at 301-691-3600.
Daniel Cohen, CPA
Daniel Cohen, CPA
Daniel Cohen, CPA is a Director in the Tax Department at E. Cohen and Company, CPAs and a Wealth Strategist at Impact Capital, LLC. He works with high-net-worth individuals, real estate clients, and other industries, reviewing complicated individual, partnership, S-corporation, and trust tax returns.
He is also experienced in tax and estate planning, real estate transactional planning, and consulting with individuals and businesses on complex compliance matters. Daniel is a member of t