By Gary K. Liska, MS, CFP®, AIF, CRPC, AAMS
Founding Partner, CFO
Take advantage of your opportunities
As part of the Tax Cuts and Jobs Act of 2017, the lifetime gift and estate tax exemption amount was essentially doubled—from $5.49 million to $10 million adjusted annually for inflation. This means for the 2021 tax year, no estate taxes or gift taxes are due on the transfer of assets valued below $11.7 million. Any amounts in excess of this are then taxed at a flat 40%. It’s a substantial exemption amount that covers all but the very largest estates.
What you may not have considered, however, is the considerable uncertainty surrounding the future of this exemption amount. Not only is the current $11.7 million scheduled to ‘sunset’ at the end of 2025 (reverting back to the previous exemption amount adjusted for inflation—or about $6.5 million in 2026), it potentially could be lowered even further.
During his election campaign, President Biden strongly advocated for a return to the $3.5 million estate and gift tax exemption amount that existed during the Obama presidency. Now that he’s in office, and with an albeit slim Democrat majority in Congress, we can be reasonably certain that some tax policy changes are not too far off on the horizon.
Even though his recently announced American Families Plan, (which outlines the administration’s agenda for raising taxes on the wealthy) doesn’t yet include any exemption change, wealthy families may want to take time now to take advantage of the current opportunity, before the window potentially closes.
While outright gifts are the simplest way to use your lifetime exemption amount (provided you’re confident in handing over control of considerable wealth to recipients), the following are a few other ways (some easy and some more complex) for proactive planners to benefit from the current tax-friendly environment:
Gifting to 529 plan accounts
You’re probably aware you can gift up to $15,000/year ($30,000 for married couples filing jointly) to any individual without the gift being subject to taxes or counting against your lifetime exemption. But did you know that when you contribute to a 529 Plan, you can take advantage of a 5-year accelerated gifting option allowing you to contribute $75,000 at one time ($150,000 for a married couple) to each of your children or grandchildren. It’s an ideal way to save for the future education of a child where the funds can grow tax free for any qualified education expenses. Take note, however, that 529 Plan ownership can impact financial aid eligibility, so you’ll want to consider that in determining account ownership.
Setting up a dynasty trust for multiple future generations
If you have considerable wealth and haven’t yet used some or all of your lifetime exemption, you may want to consider funding a dynasty trust with a gift up to the amount of your generation skipping tax (GST) exemption. A dynasty trust can provide for future generations of your family as long as state law permits the trust to remain in existence. Any future appreciation and income earned by trust assets can then be transferred between subsequent generations without being subject to estate and gift taxes. And the value of the trust can be further amplified when funded with life insurance.
Purchasing life insurance held in an irrevocable trust
One of the most effective ways to tax-efficiently transfer wealth is by purchasing a survivorship policy owned by an irrevocable life insurance trust (ILIT). Not only are policy costs considerably lower when based on two lives rather than a single life, the death benefit paid out to your heirs will be both income and estate tax free. For example, you might gift $3 million to an ILIT to purchase a $10 million whole life policy with your two children receiving the death benefit upon the death of the second spouse.
One additional bit of good news is that the Treasury Department has issued regulations stating that should the lifetime exemption amount be reduced, any wealth transfers made prior to a reduction will not be subject to retroactive taxation. So there’s no fear of any efforts you undertake now being undone in the future.
Perhaps most importantly, carefully consider the inherent underlying value in the idea of gifting to your loved ones while you’re still alive—when both you and your beneficiaries can enjoy the fruits of your generosity together. Just make sure to try and free yourself from any emotional connection to the assets you gift. After all, it’s not really a gift if there are strings attached.
Gary K. Liska may be reached at 310 712-2323 or www.seia.com
 IRS Rev. Proc. 2018-57
Securities offered through Royal Alliance Associates, Inc. member FINRA/SIPC. Investment advisory services offered through SEIA, LLC, 2121 Avenue of the Stars, Suite 1600, Los Angeles, CA 90067, (310) 712-2323. Royal Alliance Associates, Inc. is separately owned and other entities and/or marketing names, products or services referenced here are independent of Royal Alliance Associates, Inc.