They say that you ought to think of your life expectancy as a yardstick. If you are age 25 you’ve reached one foot, at 50 you have both feet on the two-foot mark, and at 65 you’re somewhere between 31-32 inches. You get the drift.
As you get toward the short end of the stick you start thinking a little differently. When you get a new credit card you begin to wonder if you will expire before it does. Or acquisition of a new pet leads you to consider who might be around longer.
And now, if you are wealthy, the “sunset provisions” in the new tax law have provided a new reason for speculation regarding your longevity.
The Tax Cuts & Jobs Act of 2017 doubled the lifetime exemption allowing for the transfer of property without incurring a gift or estate (or generation-skipping) tax. Every taxpayer can now give away up to $11,400,000 without fear of transfer tax. Proper planning will allow a married couple, with proper planning, to give away $22,800,000, even as late as the second death.
But there is a hard pre-condition if you intend to take full advantage of the exemption in your final estate. You must die before midnight on December 31, 2025. On January 1, 2026, the inflated exemption turns back into a pumpkin with a projected value of around $6,560,000. So, much like drug-induced relief from any physical discomfort, the temporary comfort the law provides will disappear once the legislative pain-killer wears off.
Nonetheless, there are two important planning opportunities during this eight-year window.
First, there is no limit on the exemption for gift tax purposes. So significant assets can be moved transfer tax-free out of your estate during your life. Depending on your circumstances you may be able to accomplish this while maintaining effective control over and use of the assets, most often in the form of a spousal lifetime access trust (SLAT), if you are married.
Second, this will allow you to fund sufficient life insurance coverage outside your taxable estate to pay the anticipated estate tax liability that will return when the sunset provision kicks in. A sizable gift could eliminate the need for and frustration of scrounging around collecting enough annual exclusion amounts ($15,000 per calendar year in 2018) to pay policy premiums.
This is a planning strategy you can shake a yardstick at! Cancelling in-force policies or delaying new coverage because of the temporary exemption increase could create much misgiving if down the road new insurance has become unattainable once the sun has set on this seeming safe place from transfer tax.