A question we hear often from clients is whether they should take any estate planning actions in anticipation of the federal elections. There is no easy answer to this question and no “one-size-fits-all” approach. This is a brief summary of the current state of the federal gift and estate tax laws and some thoughts as to whether it may be advisable to make significant gifts this year.
CURRENT LAW
In 2020 each person can transfer (either during lifetime or at death) assets valued up to $11,580,000 free from federal tax. Each married couple can correspondingly transfer up to $23,160,000. This is called the exclusion amount and it is indexed for inflation annually. In the absence of further action by Congress, the exclusion amount is scheduled to revert to $5,000,000 per person ($10,000,000 per married couple), indexed for inflation, on January 1, 2026.
A 40% federal gift or estate tax would be applied against the value of any assets in excess of the exclusion amount that are transferred to beneficiaries other than a spouse or charities.
REASON TO MAKE GIFTS NOW
There has been much speculation about what will happen under a new Congress and depending on who wins the presidential election. Although there are no definitive proposals to reduce the exclusion amount or increase the federal gift and estate tax rate, there are many who think such changes would be likely under a new administration. In addition, concerns have been raised as to when such new tax laws would become effective, some fearing that any new law could be retroactive to January 1, 2021. This risk – and uncertainty – has caused some clients to think about “locking in” their exclusion amount now by making gifts prior to the end of this year. In our view, this should only be considered by clients who:
- Have not already used all of their exclusion amount.
- Have sufficient assets so that they can use most or all of their remaining exclusion amount without disrupting needed cash flow or jeopardizing long-term financial security.
- Have assets that are conducive to making gifts.
Clients who wish to lock in their exclusion amount this year will need to move forward quickly. In particular, gifts of assets other than marketable securities will need high quality professional appraisals. The overall design of any gift transaction, including the terms of trusts to receive gifts, will need to be fleshed out in the very near future.
