Now is the Time – Use it or Lose it:

The Temporary "Big" Estate & Gift Tax Exemption may be going away at the End of this Year

by Gary Katz

The 2017 tax act temporarily increased the federal estate & gift tax exemption to the most generous it has ever been —- this exemption in 2020 is $11.58 million per person. Under existing tax law, this "Big" exemption is scheduled to be repealed at the end of 2025. However, depending on the results of the election in November, this "Big" estate and gift tax exemption may instead be going away soon after the end of this year. In addition, the elimination of this generous exemption may occur notwithstanding the election results due to the perceived need for additional federal government revenue resulting from trillions of dollars of COVID-19-related spending.

Many Farmers, growers, ranchers and packers will deem utilization of this exemption now, while it still exists in its current form, to be an incredible financial benefit for their legacy planning — this may well be a "use it or lose it" proposition. In addition, due to a favorable valuation climate and incredibly low interest rates, effective estate planning techniques are currently even more beneficial than they have been in the past. Now is the time to act.

Background

On December 22, 2017, the most significant tax legislation in over 30 years was signed into law — the Tax Cuts and Jobs Act of 2017. This legislation did not repeal the federal estate tax as hoped by some advocates. However, this new legislation did provide temporarily relief from the federal estate tax for those persons who die prior to the end of 2025 and can provide permanent estate tax relief for those individuals who take advantage of gifting opportunities prior to the repeal of this generous exemption.

This 2017 increase in the federal estate & gift tax exemption expires upon the earlier to occur of:

  1. The end of 2025; or
  2. New tax legislation passed in, perhaps, 2021.

While the increased federal estate and gift tax exemption is only temporary, the new tax legislation provides tremendous opportunities to use this increased exemption prior to its expiration through the use of effective and efficient estate planning gift strategies such as:

  • Dynasty Trusts, which provide generations of protection from creditors' claims, divorce claims, and future federal estate taxes and state estate taxes
  • SLATs (Spousal Lifetime Access Trusts), which protect assets from future estate taxes while retaining those assets for use in your generation before such assets pass to children and grandchildren
  • GRATs (Grantor Retained Annuity Trusts), which allow gift tax free transfers of assets to the next generation
  • LITs (Irrevocable Life Insurance Trusts), which protect life insurance proceeds from federal estate taxes and state estate taxes
  • CLATs (Charitable Lead Annuity Trusts), which provide for both a charitable income tax deduction and a gift tax efficient transfer of assets to the next generation.

In addition to these tried-and-true estate planning techniques being incredibly effective in and of themselves, the positive valuation climate coupled with the lowest "AFRs" ("Applicable Federal Rates" — minimum rates of interest that must be used in certain estate planning and other transactions) in recent memory serve to only enhance the benefits of this type of generational legacy planning.

For those of us who reside in states that currently have their own separate state estate taxes, such as New York, Illinois, and Connecticut, these state estate taxes also need to be separately addressed so as to decrease the tax liability facing families when a loved one passes.

Estate planning attorneys and CPAs have been concerned that the IRS might, in the future (after use of the "Big" exemption and its subsequent decrease) attempt to retroactively tax gifts that were made during this period of the "Big" estate & gift tax exemption. However, at the end of 2018, the IRS stated in a proposed regulation that the tax agency will not seek a "clawback" and will not impose such retroactive taxes. This is very good news for taxpayers and is ratification that solid estate planning implemented prior to any repeal of the “Big” exemption will last for generations to come — now is the time.

If you wish to discuss these new developments and how taking advantage now of the temporary "Big" exemption can benefit you and your family, please contact Gary Katz. I look forward to hearing from you.

Gary Katz is a registered representative of Lincoln Financial Advisors. Securities offered through Lincoln Financial Advisors Corp., a broker/dealer (Member SIPC). Investment advisory services offered through Sagemark Consulting, a division of Lincoln Financial Advisors, a registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates. CRN-3120847-061020 Lincoln Financial Advisors Corp. and its representatives do not provide legal or tax advice. You may want to consult a legal or tax advisor regarding any legal or tax information as it relates to your personal circumstances.