Our tax laws are in a state of flux. Among many potential changes is the possibility of losing a large portion of the $12.06 million (or the $24.12 million for a married couple) estate and gift tax exemption along with other tried and true gifting strategies. If you have been hitting the snooze button on your estate plan, your window of opportunity may be closing very quickly. Before time runs out, you should consider gifting appreciable assets to your descendants in order to fulfill your financial legacy in the most tax efficient manner.
Under current law, each person is afforded an estate and gift tax exemption of $12.06 million, adjusted for inflation for each subsequent year through the end of 2025, at which time the exemption will practically be cut in half. However, there have been several legislative efforts, albeit in the early stages of the approval process, to:
- effectively push up this sunset provision
- reduce the estate and gift tax exemption to an even lower amount than what is set to happen in 2026, or
- repeal the estate tax altogether
Given the uncertainty of if and when Congress will institute these modifications, you may want to consider acting now by making gifts to your children and/or grandchildren while this benefit is still available under current law and before it is repealed. Also, you can rest assured that such gifts would not be reversed and individuals taking advantage of this planning opportunity will not be adversely impacted in the event the estate and gift tax exemption is scaled back.
One popular gifting strategy, especially in low interest rate environments, that could practically go extinct is the use of a Grantor Retained Annuity Trust (GRAT). This estate planning vehicle allows someone to transfer assets to a GRAT with a right to annuity payments during the term of such trust. At the end of the term, the value of the trust assets would then go to remainder beneficiaries (i.e., children and/or grandchildren). A highly effective and widely used form of a GRAT is what is commonly known as a short-term zeroed-out GRAT. This type of GRAT is set up with a short term (typically two years) and with annuity payments set at a level that would value the gift portion at zero, resulting in no gift tax implications. However, if Congress has their way, this type of GRAT would be terminated through the enforcement of a minimum gift value (possibly a gift value that is at least 25% of the fair market value of the trust property) and a minimum term (possibly 10-year minimum term). If suitable, you may want to consider implementing a GRAT strategy now while interest rates are still relatively low and before these proposed adjustments go into effect.
Also on the chopping blocks is a commonly used freeze technique of “selling” assets to an Intentionally Defective Grantor Trust (IDGT). The mechanics of how a sale to an IDGT works is complex, but essentially, an individual, barring any revisions to the tax law, can sell assets to an IDGT in exchange for a promissory note to effectively freeze the value includable in the transferor’s estate without paying income tax on the inherent gain. However, proposed legislation would force the recognition of the inherent gain at the time of transfer and include assets of a grantor trust in the transferor’s estate. In the wake of these potential changes, you should consider a sale to an IDGT before Congress pulls the plug, provided that it is a proper estate planning tool for your state of affairs.
Although nobody can predict if and when our current tax laws will be overhauled, do not leave it to chance. If these strategies are not already part of your financial plan, contact us today so that we can help evaluate your circumstances and determine if it is appropriate to implement any of these gifting strategies. Now is the time to prepare for the financial legacy you will leave for generations to come before new rules are signed into law that take away these powerful estate planning tools.
|David Yoo, CPA, MBT, CFP®
Director of Tax and Financial Planning
First American Trust
David brings over 24 years of tax experience servicing wealthy individuals and their closely held businesses, with a strong emphasis in the taxation of estates and trusts. As a Director of Tax and Financial Planning, he is responsible for overseeing the Tax Department and advising clients on their tax planning needs vis-à-vis income, estate, gift, and charitable matters. David is a licensed Certified Public Accountant in California and a Certified Financial PlannerTM, and earned his Master of Business Taxation degree from University of Southern California and his undergraduate degree from University of California, Irvine.
First American Trust, FSB, and its affiliates do not provide tax, legal or accounting advice. Any such content provided herein has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal or accounting adviser(s) before engaging in any transaction.