The talk of the town regarding possible changes to the transfer tax laws under a new Congress and administration has been what might happen to the estate and gift tax lifetime exemption. Currently every taxpayer can shelter (either through lifetime giving or at death) up to $11,700,000 of their taxable estate from the ravages of federal death taxes as high as 40%. Under current law the exemption amount was set to reduce by 50% on January 1, 2026.
Talk on the Harris/Biden campaign trail was the preference for an immediate reduction of the exemption to $3,500,000 per taxpayer and a maximum rate of 45%.
On September 13, the House Ways and Means Committee gave us the first glimpse of what the future may hold when it released its proposal for the Build Back Better Act, some 600-plus pages affecting everything from soup to nuts. Changes to the lifetime exemption in the draft are somewhere in between the positions above.
The proposal would simply move the current 1/1/26 reductions to January 1, 2022. Not the worst thing in the world, I guess. Except now clients may only have 90 days to take advantage of the inflated exemption amount rather than four years.
Some considerations before pursuing this strategy:
- Significant transfers of property would be involved. Is the client willing to “let go” of the control of that much of his or her net worth? If not, consider a Family LLC to hold assets where only non-voting ownership interests are passed to donees.
- Since donees assume the income tax basis of the donor, consider transferring assets in which your clients have the least gain. Leave appreciated assets at death when heirs have the advantage of a step-up in basis!
- To benefit from immediate gifting the total amount transferred must at least exceed the anticipated reduced amount of the exemption – in this case $5,700,000. For example, if a taxpayer with a current $11,700,000 exemption gifts only $5,700,000 and the new law reduces the exemption to $5,700,000, he or she will be deemed to have used their full exemption. The window for use of the prior (and unused) additional $5,700,00 will be closed.
- Married couples have two exemptions to work with. Exhaust the exemption of one first by attributing all giving to one spouse. This may require changing ownership in property from one spouse to the other prior to gifting, so be careful of community property where each spouse will be deemed to have given one-half the value unless changes in ownership are made.
The good news is the BBB Act proposal makes no changes to the step-up in basis an heir receives on inherited property under the current law.
Call our team with questions regarding these issues or with any planning questions you have on your casework.