In 2018, as part of the Tax Cuts and Jobs Acts (TCJA), the lifetime exemption limit for estate and gift tax purposes was increased to allow individuals to transfer double the previous amount over their lifetime without incurring taxes. Presently, individuals can transfer up to $13.61 million, while married couples can transfer up to $27.22 million. As a result of this change, high-net-worth individuals whose estates are subject to transfer taxes have an opportunity to significantly reduce future estate and gift taxes.
However, as the expression goes, all good things must come to an end. As it currently stands, the lifetime exemption is scheduled to sunset at the end of 2025 and drop back to $5 million as of January 1, 2026. Additionally, the maximum gift and estate tax rate (currently 40%) will increase to 45%. The sunset provision, if not extended, could significantly impact the financial benefits of generational gifts unless Congress intervenes.
Considering this timeline is crucial for individuals planning to leverage the current favorable limits, it is important to start implementing estate planning strategies now, while there is still time.
Actionable Strategies:
- Gifting Shares of Privately Held Businesses and FLPs: Gifting shares of stock in a privately held business and family limited partnerships (FLPs) is an effective strategy to utilize the current lifetime exemption and increase personal tax deductions. This approach provides an avenue to transfer assets with growth potential such as business interests, real estate and stocks held in closely-held entities.
- Charitable Gifts for Tax Efficiency: Charitable gifts represent another avenue to navigate tax implications. Making charitable gifts can help individuals avoid capital gains on future sales and simultaneously increase personal deductions. This strategy aligns with both philanthropic goals and financial planning.
Next Steps:
While there is still time to make decisions and take advantage of current exemption limits, the planning process can be lengthy, so it is essential to have conversations today. An effective plan requires input from a team of professionals including estate attorneys, accredited business valuation professionals, wealth managers and tax experts. For reliable business valuation advice and well-reasoned opinions, the Business Valuation Practice Group of Evergreen Advisors is here to assist.
Our expertise covers various industries, offering services such as Estate and Gift Tax Planning, Fair Value for Financial Reporting, Equity Incentive Plans (409A), Employee Stock Ownership Plans (ESOPs), Transaction Support, and Fairness & Solvency Opinions. For inquiries, please contact us at 410-997-6000.