The federal estate, gift, and generation-skipping transfer (GST) tax exemptions are all at the historically high level of $11,580,000 per person ($23,160,000 for a married couple). Under current law, the exemptions are scheduled to revert to $5 million per person (indexed for inflation) on January 1, 2026. However, the exemptions could be reduced as early as January 1, 2021, depending upon the results of the upcoming election. Therefore, it may be advisable to consider making gifts to use some or all of your remaining gift and GST tax exemptions in 2020, while they are available to you.
To the extent you make gifts using an exemption in 2020 in excess of the amount of the exemption that might be available to you in a future year, you have made use of a “bonus” exemption that may never be available to you again. For example, if an individual makes a gift in 2020 so that her cumulative gifts are $11 million, no gift tax will be owed in 2020. If the exemption is reduced to $5 million in 2021 and she dies in a year when the exemption remains at $5 million, by making the gift in 2020 she will have used $6 million of “bonus” exemption that is not otherwise available at her death. Assuming the estate tax rate remains at 40 percent, her 2020 gift would result in savings of $2,400,000. In addition to the bonus exemption, any appreciation on the gifted assets after the date of the gift will pass free of estate tax. An additional benefit might be achieved if you gift minority interests in closely held businesses or investment entities. In that case, a valuation often can be obtained for the minority interest which values the gifted assets at a substantial discount.
Of course, the outcome of the election or any future tax legislation that might be enacted cannot be known now with any certainty. However, the opportunity to plan is here now, and it may be too late to plan when the outcomes are known. We would not encourage gifting for tax purposes alone, but if you are interested in transferring wealth to your family, now is a good time to reach out to us to discuss how that can be accomplished effectively. If you wait until mid or late November, it may be too late to accomplish sound planning before the end of the year.