The rich may get richer, but they have a dickens of a time keeping it.
This is a reality that divide-and-rule pundits pointedly overlook, while ordinary folks on up understand everything: you earn it, you want to keep it. We will concede the grey area of inheritance: just how much should one be allowed to pass on to heirs who may realistically – we’re hedging our words carefully here – rate as undeserving?
The current tax regime stands on a favorable compromise position. The estate tax exemption is currently at $11.58 million per person and double that for married couples. This figure reflects a $180,000 increase on 2019, the annual inflation adjustment called for in legislation. The exemption amount is high enough to rank as heady for most of us, but there’s a catch every tax mitigation strategy must heed: this is a limited time offer.
In 2025, the estate tax exemption will revert to $5 million per person – that’s the pre-2018 limit, in force before the Tax Cuts and Jobs Act of 2017. If you want to benefit from the currently liberal estate-tax regime (perhaps Democrats wouldn’t state it this way), you’ll need to act savvy today.
The easiest strategy is to make a gift of $11.58 million while you’re alive to take advantage of the gift tax exemption. Many high-net-worth individuals and business owners know they can make the transfer after death, but are unaware they can do it during their lifetime. This gambit takes care of the people you want to support, while shrinking the size of your estate and keeping the taxman at bay after you’ve gone.
Businesspeople who own growing concerns might be worried about the appreciation of their company’s value – a curious lament, at first glance, until we consider the estate-tax implications. Let’s say you plan to leave your shares, currently valued at $2 million, to your daughter. By the time you pass away, that stake could be worth ten times that amount or more. Giving the shares as a gift today uses a touch less than 20% of your total exemption– later, after your death, the value of the same shares could well exceed the entire amount.
Financial planner and attorney Michael Garry emphasizes that by gifting such shares today, any later value appreciation “takes place out of your estate.” We only hope that you’ve trained the recipient to act responsibly while you’re still in this world.
Wondering if this strategy is sound? A case is reported of a man who launched a business and immediately assigned 25% of its shares to his two young children via a trust arrangement. In this case, the dream came true: he sold the company one year later for $1 billion. Good old dad.
“It cost him $50,000 in exemption because the business wasn’t worth anything at the time, but now $250 million is out of his estate,” says Harry Drozdowski, who works with super-wealthy clients at Wells Fargo. This case illustrates why he counsels tax-averse clients, “the earlier your start, the better.”
We can reasonably wonder if these happy times could all come crashing down in the wake of political changes or dire shifts in the economic realm. We’ve also heard concerns about what might happen in 2025, if the IRS finds itself in a claw-back mood. Fortunately, the tax authority ruled recently that we needn’t fear any retroactive take-back of the benefits linked to large-scale gifting today, either in 2025 or anytime sooner. As always, we counsel alacrity in seizing the opportunity at hand: experience shows that those who wait often live to rue their insouciance.
For more information, please read:
It’s time to create an estate plan to take advantage of the big tax exemption | CNBC