Are you planning to make a large gift to your children sometime before the 2017 Trump tax law – which doubled the federal estate tax exemption for estate, gift and generations skipping taxes – sunsets in 2026? If the answer is yes, you may want to consider doing it sooner than later.
Under current law, the estate tax exemption amount, which is adjusted yearly for inflation, will drop back to $5 million in 2026. For example, in 2019 the federal exemption amount is $11.4 million per person. If you’re a married couple, you get double the exemption amount – which is a whopping $22.8 million this year.
When the law took effect last year, many individuals felt that the clock was on their side. The year 2026 seemed a long way off, and people felt that they had a lot of time to make changes to their estate plan. Now, time may be running out.
In today’s political climate, it’s highly possible that Congress will hasten the drop in the estate tax exemption amount and may even reduce it further if the Senate and the Presidency turn Democratic. Many Democratic candidates have said they will pay for a number of proposed programs with an increase in the estate tax. Even now, there is currently legislation pending in the House to lower the exemption amount to $3.5 million and introduce a progressive rate structure.
As the possibility of impeachment and next year’s elections inch closer and closer, many wealthy families are looking at ways to take advantage of this “free money” in the event Democrats take over the Senate and the Presidency. What does all this mean in real dollars? If a couple gifts $22.8 million to their children in 2019 and the estate tax exemption later drops to $5 million per person, that means they were able to move approximately $12 million in assets down to the next generation free of estate taxes. The estate tax savings on that is approximately $4.8 million.
Remember the estate tax is a one-time tax imposed on an estate nine months from a person’s date of death. It is different from the yearly income tax due every April 15 or the wealth tax that has been proposed by Senator Elizabeth Warren. The estate tax is what Republicans dubbed the “death tax,” which many Trump supporters opposed even though the vast majority of them will never come close to being subject to the tax. Apparently no one cares about an “estate tax,” but a “death tax” raises a lot of eyebrows.
If you are among the fortunate few who will be subject to the estate tax, consider making those large gifts before you lose the opportunity. This can be done through direct gifts – which are generally not a good idea – or a variety of irrevocable trusts.
Of course, if you have already made previous gifts, you may not be eligible for the entire $11.4 million of exemption. However, you can still gift what you have not used up.
Speak to your estate planning team about ways you can take advantage of this opportunity. Be sure to include your attorney, financial advisors and accountants. They can advise you on what is best for your situation.