SIGNIFICANT TAX PLANNING OPPORTUNITY MAY SOON DISAPPEAR
2020 – OUR 28TH YEAR OF PUBLICATION!
Volume XXVII • Number 3 • September 2020
TIME IS OF THE ESSENCE – TAKE ADVANTAGE NOW
As you know, the Trump tax cuts (2017 Tax Cuts and Jobs Act) created unprecedented opportunities for individuals and families to transfer their legacies in a tax-efficient manner. These cuts allowed individuals to double their estate, gift, and generation-skipping transfer tax exemption amounts from previous levels. While the unified federal estate and gift tax exemption amount for 2020 is $11.58 million per person, this increased exemption (as indexed for inflation) is scheduled to remain in place only until December 31, 2025, after which it is set to decrease to $5 million per person.
However, depending upon the outcome of the November 2020 election, the elevated exemption levels may be cut much sooner, and the rates may increase as well.
This means that these once-in-a-lifetime wealth-transfer planning opportunities may soon disappear.
For this reason, it is more crucial than ever for you and your family to consider utilizing your elevated gift tax exemption before this year end.
Taking advantage of the elevated gift tax exemption requires transferring, or “gifting”, assets out of one’s taxable estate. The ideal assets to transfer to maximize the benefit of this type of planning are assets likely to appreciate. Any appreciation in transferred assets completely avoids federal estate taxation. A simple example: $1,000,000 in appreciation avoiding federal estate tax (at today’s maximum rate of 40%) would save $400,000.
Transfers may be made of less than a 100% interest in an entity: A benefit of transferring less than 100% ownership in an entity is that the transferor may take applicable valuation discounts with respect to the gifted interest to reduce its value for estate and gift tax purposes (thereby enabling a larger transfer of wealth). If the fractional interest being gifted is also a minority interest in a closely held business entity, which owns real property (for example), discounts for both lack of control and marketability should apply.
HOW TO REALIZE THIS SIGNIFICANT ADVANTAGE
An ideal way to take advantage of the current level of the federal gift tax exemption is to establish and gift assets to an irrevocable “Estate Freeze Trust” (for some background, see: Volume XX, Number 1). While gifting assets to a conventional irrevocable gift trust will allow you to transfer assets out of your estate and help protect the gifted assets from future unforeseeable creditors, the downside to using the conventional trust is that the gifts are irreversible. This means you will not be able to reclaim the gifted assets at a later time.
In contrast, by gifting assets to a properly structured Estate Freeze Trust, you can realize all the benefits available under a conventional irrevocable gift trust, and, in addition, gain the flexibility to recapture all or part of the gifted assets down the road in the event you should ever need or want them. Thus, using the Estate Freeze Trust as your wealth transfer vehicle will not only help you achieve your tax planning and asset protection goals, but will also afford the peace of mind you desire in light of today’s unpredictable economic and political climate.
TIME IS OF THE ESSENCE. Establishing the Estate Freeze Trust and opening accounts within the trust (which will be a Cook Islands trust) requires lead time and things will get busy before this year end. Once the increased estate and gift tax exemptions sunset, which could be as early as this coming January 1st, the ability to transfer such an extraordinary amount of wealth without estate tax implications will be eliminated: curtailing your tax and asset protection planning flexibility. For those who desire ultimate financial peace of mind, establishing an Estate Freeze Trust will be an important planning device for achieving these goals.