The Federal Estate and Gift Tax Exemption could be slashed from $11.5 Million to as low as $3.5 million effective as soon as January 1, 2021. Planning now can help you lock in the current exemption before it is drastically reduced.
The 2020 Federal Estate and Gift Tax Exemption is $11,580,000, but under the current law, the exemption is slated to revert to the 2017 level of $5,490,000, adjusted for inflation at the end of 2025. In 2020, each person can give away $11.58 million during their lifetime. Whatever portion they haven’t used during life, they can use at death. That generous exemption is scheduled to be cut in half at the end of 2025, but could be slashed and effective as soon as January of 2021. However, if you use the exemption before it is reduced, you won’t be penalized by a “clawback” upon your death.
For example, let’s say Susan has $11.58 million and gives it all away in 2020. Let’s assume she lives off her social security and dies with nothing in 2026. She would not owe any estate tax, even though she had given away $11.58 million and the exemption at her death in 2026 is half that amount.
In other words, if Susan used her exemption before 2026, she wouldn’t have to worry about paying estate tax because of the gifting she did within the exemption during her lifetime, even though that exemption later decreased.
Does that mean Susan should wait until 2025 and then decide what to do? Unfortunately, not. Some voices in Congress have called for an earlier repeal of the law which included the doubling of the exemption to its current level. Others have called for the exemption to be lowered even further, to $3.5 million per person, or less.
A shift in power in Washington after the 2020 election could bring those voices to power and see their vision realized. Does that mean Susan could wait until legislation is passed by Congress and signed by the President to act? Again, unfortunately not. Legislation could be passed in 2021 and could be retroactive all the way back to January 1, 2021. In other words, to be safe, you would need to act before the end of 2020.
We want you to know that this means now may be the best time to take advantage of the exemption before it decreases significantly. One effective tool for utilizing the lifetime gift exemption at the current rate of $11.58 million per person is the Sky Is Falling Trust (SIFT).
A SIFT is an irrevocable trust that allows the grantor to borrow from it without adequate interest or security, effectively preserving the grantor’s ability to access trust property. Thus, in the event the grantor determines that “the sky is falling” and they need or want access to the assets they have given away, the SIFT can allow them do do so.
SIFTs are taxed as grantor trusts for income tax purposes. This means that the grantor continues to bear the income tax burden for the trust. Thus, it is exactly the same income tax situation as if the trust had not been created in the first place – no better and no worse.
Typically, it is preferable to fund a SIFT with assets that are likely to appreciate significantly, as those assets can continue to grow and then pass on to their children free of estate tax.
We know this letter may raise more questions than it answers. For more information about the Sky Is Falling Trust (SIFT) or other estate planning options and how they might work for you and your family, please call our office to schedule a time to discuss this. We are here to help you now, and in the future.