If you and your spouse have assets greater than $7 million even after accounting for lifetime living expenses, you need to be watching potential tax reform closely and be prepared to make some changes now to avoid having to pay additional taxes later.
One of the most impactful proposed reforms for high net worth families is a reduction of the gift and estate tax exemption from the current $11.58 million level per person ($23.16 million per married couple) to just $3.5 million per person ($7 million per married couple).
For 2020, the federal estate and gift tax exemption is $11.58 million per person, which means a married couple collectively has $23.16 million of estate exemption. The exemption, which covers the combined total of gifts made during lifetime and at death, is scheduled to increase to $11.7 million per-person for 2021. Estates with assets more than the exemption amount are subject to a 40 percent federal estate tax at death. This is in addition to potential estate taxes at the state level (currently imposed by 12 states and the District of Columbia).
The current exemption of $11.58 million per person is significantly higher than the exemption amount just three years ago. As a result of the Tax Cuts and Jobs Act (TCJA) passed in late 2017, the estate exemption jumped from $5.49 million per person in 2017 to $11.18 million in 2018. For historical perspective, the estate exemption was only $3.5 million as recently as 2009.
From a legislative standpoint, the estate exemption is scheduled to remain at an elevated level through 2025, at which point the exemption would revert to $5 million per person (adjusted for inflation) in 2026.
Individuals or couples with an estate larger than $3.5 million or $7 million, respectively, even after accounting for lifetime living expenses, need to watch this legislation closely. Gifting additional assets now could be a smart move particularly for those with an estate larger than the current $11.58 million/$23.16 million hurdles.
Strategies may include outright gifts to individuals, gifts in trust, intrafamily loans to purchase family assets at low interest rates to shift appreciation to the next generation, and accelerating intra-family transfers of closely held businesses while current discounts are available. An experienced estate planning attorney should be able to help determine the viability of different strategies for individual circumstances.
No. The Treasury Department and the IRS issued final regulations in November 2019 which clarified that individuals taking advantage of the increased exemption amounts from 2018 to 2025 would not be adversely impacted after 2025, should the exemption amount drop.