Tax

Before Sunset: Time Is Running Out On The Estate Tax Exemption

Justin Miller Neza Gallitano and Alex Pavelock Evercore Wealth Management October 11, 2024

 Before Sunset: Time Is Running Out On The Estate Tax Exemption

While there is no optimal strategy that works for all people, they need to start thinking – assuming that they haven't prepared already – about their tax affairs as the clock ticks down toward the November 5 elections. This article comes from senior figures at Evercore.

With the US elections getting ever closer, the need for HNW individuals and families to get their tax affairs in order is becoming more urgent. Important taxes, on estates for example, are due to change and exemptions will fall, unless there's a change of policy from Congress. Given the direction of fiscal policy and America's rising debt burden, politicians of all parties are going to be under pressure, and that puts the "rich" in the frame. This, of course, is not unique to the US.

To discuss the terrain are Justin Miller, Neza Gallitano and Alex Pavelock (more on the authors below). The editors of this news service are pleased to share these ideas and we invite readers to jump into the conversation. Email tom.burroughes@wealthbriefing.com
 

Sunset is when the sun appears to sink below the horizon. However, when it comes to estate planning, sunset is when the current gift, estate and generation-skipping transfer, or GST, tax exemption under the Tax Cuts and Jobs Act of 2017 gets cut nearly in half. After 2025, individuals will be limited to giving an estimated $7.18 million tax-free to their heirs, down from the current $13.61 million “use-it-or-lose-it” exemption amount. An historic window of opportunity to maximize intergenerational wealth transfer is set to close soon.

Depending on elections in November 2024, it is possible that Congress – with the future president’s approval – could extend the historically high exemption amount by passing legislation similar to the Tax Cuts and Jobs Act of 2017. However, such an extension seems unlikely at this point, given the extent to which it would increase deficits. The Congressional Budget Office recently estimated that the cost of extending just the exemption levels through 2033 would be approximately $167 billion.

If 2026 still seems a way off, consider that some trust and estate attorneys are already turning away clients as the deadline looms. Anyone able to take advantage of the full exemption who fails to use more than $7.18 million will likely lose the remainder as of 2026. Also lost after 2025 will be all the potential estate-tax-free appreciation of those assets, perhaps for generations to come. If that $13.61 million generated, say, a net 7 per cent return over 30 years, that’s more than $40 million of savings at the current 40 per cent gift and estate tax rate. For an ultra-high net worth couple able to gift twice that amount, the savings would be more than $80 million. 

In short, this is the time to address three key questions: Can you afford to gift? If so, how much? And what should you give?

Preserving peace of mind is the starting point. Individuals and couples need to know that they will retain sufficient assets to sustain their lifestyle and meet other goals – a decision that should be made only after a thorough financial analysis. And even if parents or grandparents are ready to give, family members might not be ready to receive. Next-generation readiness and, often, complex family dynamics must be considered too.

For those whose financial analysis shows that they should not gift more than the $7.18 million threshold ahead of the sunset, it is still prudent to begin estate planning sooner rather than later to maximize potential future growth outside of the estate and reduce the potential future estate tax exposure. 

Trusts can play a key role here, helping to ease this transition and in planning for the unknown, including future generations. Spousal lifetime access trusts, or SLATs, Dynasty Trusts, and Intentionally Defective Grantor Trusts, or IDGTs, can preserve and protect wealth. Structuring any trust as a grantor trust amplifies the power of estate planning, as the grantor continues to pay the income taxes on the trust. This allows trust assets to compound over time unencumbered by taxes while the grantor reduces the amount of their estate that could be subject to future estate taxes without using up any additional exemption amount. 

Keep in mind that the choice of an individual and/or corporate trustee is critical. Both an individual trustee and corporate trustee should know the family well and be confident that they can carry out their duties for a long time. Moreover, an individual and corporate trustee can be named together as co-trustees where the corporate trustee can educate and otherwise support the individual trustee by lessening the administrative burden, as well as assisting with future trust management and governance issues. (For more information, please visit https://evercorewealthandtrust.com/choosing-the-right-trustees/).

The next consideration is generally which assets to give and how to structure those gifts. Cash, real estate, public securities and private investments each have associated implications that need to be considered, as illustrated below. Each situation is different, so it is important to run different test scenarios taking into account factors such as basis, capital appreciation and liquidity – to evaluate the pros and cons of gifting each type of asset. 

Cash is straightforward, as there are no concerns around valuation or embedded gains. However, most people have a limited amount of cash on hand, and what they do have is reserved for lifestyle needs. The next option would be publicly traded securities, which, while also relatively easy to gift, require the consideration of additional planning considerations, such as embedded capital gains. It’s important to know that assets gifted during a lifetime will retain their tax basis and will not receive a step-up in tax basis at death.

In other words, many assets – other than certain exceptions like retirement accounts – will have all the capital gains disappear if still owned at death, which does not apply to assets given away during life.

Private investments, such as private equity funds, can also be a great option for gifting; although gifting such assets can often involve greater complexity. These assets typically have significantly lower valuations early on but can later grow substantially for the benefit of heirs. Similar to private equity investments, closely held business interests and real property can also be powerful estate planning tools, especially taking into account potential lack of marketability and lack of control discounts for gift purposes. 

There is no one optimal strategy for gifting that works for everyone. It’s vital to customize any gifting plan and weigh the trade-offs in gifting different types of assets by working with a collaborative team of advisors, including your wealth manager, attorney, accountant, and potentially other specialists. Gifting these amounts is a big decision, one that should only be made in the context of a comprehensive estate plan. But if gifting is a goal, there may be limited time to do it in the most tax-efficient manner.

About the authors
Justin Miller is partner, national director of wealth planning at Evercore Wealth Management and Evercore Trust Company. Neza Gallitano is managing director, wealth and fiduciary advisor; and Alex Pavelock is director, wealth and fiduciary advisor. 

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