A key benefit to families with taxable estates may be about to go away. The Tax Reform Act of 2017 incorporated numerous tax reductions into U.S. law, with one significantly increasing the ability of taxable estate owners to provide substantial gifts to others tax-free. However, the Act is scheduled to expire on December 31, 2025. Without a congressional extension, this sunset would revert the U.S. tax code to provisions prior to the law’s enactment.
What does this mean for the Federal Gift and Estate Tax? The exemption for making gifts during life or leaving assets at death without taxation will likely revert from the current exemption per person of $13,610,000 to a lower exemption of $5,000,000 indexed by inflation from 2011 – likely around $7,000,000 per person.
Here are considerations for taxable estate owners given the possibility the sunset will occur.
Should I Act Now?
Many of our clients are making large gifts to Spousal Lifetime Access Trusts (“SLATs”) to fully use their current large gift tax exemption. A SLAT is an irrevocable trust where both a spouse and children can be beneficiaries. The amount in the SLAT and any appreciation thereon will not be subject to estate taxes on the death of the spouse making the gift, nor for any death at any future generation due to the concurrent generation skipping transfer tax exemption. A gift of $13,610,000 made in 2024 compounded at 4% annually in 20 years could shield nearly $30,000,000 from gift and estate taxes.
What Assets Should I Give?
Taxable estate owners should focus on assets with high appreciation opportunities, closely held business interests and private equity investments. Closely held business interests and private equity investments can carry lack of control and lack of marketability discounts in the range of 30-37%. For example, a gift of cash would be $13,610,000. A gift of a closely held business interest of $20,000,000 with a 37% discount would also be a reportable gift of $12,600,000.
I’m Not Ready. What Else Should I Be Doing?
Always check on the basics. Does your Revocable Trust have the right Trustee? Are your Powers of Attorney for Assets and Healthcare up to date? Are your assets correctly titled in the name of the Trust to avoid probate? Are you using LLCs for creditor protection? Finally, consider making annual exclusion gifts per person per year which do not count against your Gift Tax Exemption. Currently, annual exclusion gifting can be done with $18,000 from any one U.S. person to any other U.S. person.
The Bottom Line
As any casual observer knows, the U.S. Congress is anything but predictable. U.S. Tax Code is far clearer, and the right trusts and estates attorney can prepare taxable estate owners for any contingency. Consider arranging a consultation now, to be prepared in case the beneficial provisions of the Tax Reform Act do expire.
