November 29, 2020

Volume X, Number 334

Advertisement

The Case for Gifting Now (or At Least Planning for the Possibility)

Despite many attempts at repeal over the years, the modern U.S. Estate Tax has been in place since September 8, 1916. Each U.S. citizen and resident alien is entitled to a lifetime exemption from the federal Gift/Estate Tax called the Applicable Exclusion Amount. The Applicable Exclusion Amount for Gift/Estate Tax purposes is $11.58 million in 2020 and is subject to annual increases for inflation. If a donor’s taxable gift—a gift that does not qualify for the annual, medical or education exclusion—is in excess of the Applicable Exclusion Amount, or if the value of a donor’s aggregate taxable gifts exceeds the Applicable Exclusion Amount, the federal Gift Tax will be payable on such excess by April 15 of the following year. The current Gift Tax rate is 40 percent.

If the Applicable Exclusion Amount is used during a lifetime, it reduces the amount of the exemption available at death to shelter property from the Estate Tax. As a practical matter, this means that with proper planning, spouses can currently gift or die with assets of up to $23.16 million without incurring federal Estate or Gift Taxes.

The Applicable Exclusion Amount has undergone a dramatic increase in the last 20 years:

Year

Applicable Exclusion Amount

2000-2001

$675,000

2002-2003

$1,000,000

2004-2005

$1,500,000

2006-2008

$2,000,000

2009

$3,500,000

2010

$0 or $5,000,000

2011

$5,000,000

2012

$5,120,000

2013

$5,250,000

2014

$5,340,000

2015

$5,430,000

2016

$5,450,000

2017

$5,490,000

2018

$11,180,000

2019

$11,400,000

2020

$11,580,000

 

Under the Tax Cuts and Jobs Act signed in 2017, the Applicable Exclusion Amount will automatically decrease to approximately $6.5 million on January 1, 2026, after considering adjustments for inflation. Although many estate planning practitioners have already had discussions with their clients about making gifts in advance of the scheduled decrease, there is a growing sense of uncertainty about whether the higher Applicable Exclusion Amounts will remain available until 2026. That uncertainty is driven by these factors:

  • The dramatic increase in the Applicable Exclusion Amount over the last 20 years

  • Trillions of dollars of federal stimulus spending spurred by the 2019 novel coronavirus (COVID-19) global pandemic and severe economic downturn in the U.S.

  • A possible change in party control for the presidency and/or the Senate in the November 2020 election, or the use of the budget reconciliation process to pass tax increases with only 50 votes in the Senate and a democratic vice president to break the tie

  • Democratic prioritization of tax reform as a top agenda item, including a proposal from former Vice President Joe Biden raising tax revenue by $3.8 trillion over 10 years

  • Democratic discussions about a reduction in the Applicable Exclusion Amount to as low as $3.5 million, an increase in the Estate/Gift Tax rate of up to 55 percent and possible elimination of the step-up in basis

  • Past precedent of passing tax legislation mid-year and applying it retroactively to January 1

Although in the 100 plus year history of the U.S. Estate Tax system the Applicable Exclusion Amount has never gone down, should democratic tax proposals become law there will undoubtedly be a surge of family business owners and other high net worth individuals looking to implement lifetime gifts before the legislation takes effect, assuming it is even possible. Attorneys, accountants, wealth advisors and valuation experts will be inundated, and the compressed timeframe will limit their clients’ ability to consider their goals, objectives and long-term legacy in a strategic way. Those who experienced similar planning in anticipation of the ‘fiscal cliff’ leading up to December 31, 2012, already have some experience planning in that type of environment.

Those with a capacity to gift and a long-term planning view have an opportunity in this moment. In fact, 2020 has created the perfect storm for family-owned business owners and other high net worth individuals to advance and implement their lifetime gifting for the following reasons:

  • The $11.58 million Applicable Exclusion Amount is at an all-time historical high

  • The Internal Revenue Service has repeatedly signaled that a future reduction in the Applicable Exclusion Amount should not negatively impact clients who have fully utilized their lifetime exemptions (i.e. use of the Applicable Exclusion Amount should lock in the benefit)

  • Applicable federal rates that drive many common gifting strategies are near all-time historic lows (the long-term rate for August 2020 is 1.12 percent)

  • The business and economic disruptions resulting from the COVID-19 global pandemic have in many cases resulted in lower valuations for private business interests, allowing clients to gift or sell assets at a discount

  • Market volatility creates opportunity to shift marketable assets at reduced values

When it comes to the transition of family and privately-held businesses and related estate planning, timing is critical. Although some business owners are likely to adopt a 'wait and see' approach, families and individuals who want to maximize the benefits of the current tax structure and related gifting opportunities are strongly encouraged to start (or re-start) the planning process and take action to use any remaining Applicable Exclusion Amount now.

Copyright © 2020 Godfrey & Kahn S.C.National Law Review, Volume X, Number 233
Advertisement

TRENDING LEGAL ANALYSIS

Advertisement
Advertisement

About this Author

Jeffrey Billings Estate Planning Attorney Godfrey & Kahn Law Firm
Shareholder

Jeff Billings is a shareholder with Godfrey & Kahn’s Estate Planning, Estate & Trust Administration Practice Group, practicing in the firm’s Milwaukee and Appleton offices. He regularly works with families, business owners, executives, doctors, and other professionals to grow, manage and protect wealth. Jeff provides clients with comprehensive planning solutions covering a range of services, including core estate planning, business succession planning, complex gifting strategies, inter-generational wealth planning, estate and trust administration, charitable giving, and asset...

414.287.9615
Brett Koeller Corporate Lawyer Godfrey Kahn Law Firm
Shareholder

Brett Koeller is a shareholder in our Milwaukee office and co-chair of the firm’s Corporate Law Practice Group, which includes, among others, our firm’s Mergers & Acquisitions, Private Equity & Venture Capital, Securities, and Emerging Companies Practice Groups. Brett’s practice focuses primarily on buy-and-sell-side acquisitions, debt and equity financings, and general business law issues.

Brett’s transactional experience includes representative matters involving both strategic and financial buyers and public and privately-held sellers, as well as registered investment...

414.287.9445
Laura Meronk Real Estate Lawyer Godfrey Kahn Law Firm
Shareholder

Laura Meronk is a shareholder in Godfrey & Kahn’s Corporate Law and Real Estate Practice Groups, practicing in the firm’s Appleton and Green Bay offices. Laura represents clients in a wide range of general corporate and business law matters that are often integral to the advancement of the company’s goals and objectives. A significant portion of her practice involves entity formation, corporate governance, mergers and acquisitions and commercial contracts. Laura regularly works with both publicly-held and closely-held and/or family-owned businesses. In addition, Laura’s real estate...

920.831.6361
Advertisement
Advertisement