Estate and Gift Tax Exemption: Use it or Lose it
The clock is ticking on current federal transfer tax exemptions. Does that make now the right time to transfer wealth?
Individuals can now pass $11.18 million to heirs, free of gift, estate and generation-skipping transfer taxes; for married couples that exception is twofold, or $22.36 million. The Tax Cuts and Jobs Act of 2017 linked these exceptions to inflation, which means that they should continue to increase, albeit slowly, over the next few years. However, they will sunset in 2025 and the prior exemptions, $5.6 million and $11.2 million, respectively, will be restored. And that could happen sooner if the political climate changes.
The incentive to act soon is clear. That doesn’t make it an easy decision, however. Thoughtful, properly designed trusts can be a powerful tool in fulfilling a family’s long-term financial objectives, while avoiding cause for regret.
The first consideration has to be supporting your own lifestyle. Do you have enough to maintain your standard of living and meet your other personal financial objectives? If there’s any ambiguity, a spousal lifetime access trust, or SLAT, may be the right solution. Assets are gifted to the trust to utilize the increased exemption amounts but are not includible in either spouse’s estates, nor subject to additional generation-skipping taxes when property passes to younger generations. The beneficiary spouse retains access to the gifted property in the event it is needed. This can be important if circumstances change and the grantor and spouse need to recover some of the gift put in the trust.
Just as important is to consider whether your income would be sufficient if the beneficiary spouse dies before the grantor and the couple loses access to the gifted property. Divorce could also be another issue to consider. In the event of divorce, the beneficiary spouse’s status terminates, putting an end to his or her ability to receive trust distributions. Also, the grantor no longer has access to the gifted property.
Concerns that children aren’t ready to inherit can also delay decision-making. Placing property in trust now would allow the grantors to utilize the current exemptions while designing the terms of the trust to determine when and how funds are ultimately disbursed. The approach can also protect the assets from future creditors, or divorce.
There are other good reasons to act while the current law remains in effect. For example, are you holding promissory notes from prior estate-planning transactions? If so, consider utilizing some of your increased exemption amount to forgive these notes. Are the values of assets owned by one spouse greater than the increased federal exemption amounts and greater than the value of assets owned by the other spouse? If so, consider transferring assets to the less-propertied spouse to take advantage of the increased generation- skipping tax exemption, which will shelter assets passing to grandchildren and great-grandchildren from further tax.
Say, for example, you plan to leave your children and grandchildren $10 million in your estate at your death, and you die in 2026 after the increased exemption expires. Under this example, your estate would have incurred both federal and state estate taxes of about $1.6 million. If, on the other hand, you create a trust now, your unified credit and generation-skipping tax exemption could be used to offset all taxes attributable to the gift.
In addition, you could save on state estate taxes, as lifetime gifts are generally not subject to state gift tax (unless you live in Connecticut). That said, we recommend coordinating any gifts with your legal and tax advisors to better understand your specific state transfer tax rules. Further, any appreciation earned on the trust assets would benefit your family and not be subject to tax in your estate. The potential compounded growth of the portfolio at 6.4% could allow an additional $8.4 million of assets to pass to your family without additional tax.
Now is an important time to review your current estate plan and to re-evaluate whether your plan is meeting your family’s overall objectives.
Karen Francois is a Partner and Wealth & Fiduciary Advisor at Evercore Wealth Management and the Chief Fiduciary Officer at Evercore Trust Company, N.A. She can be contacted at francois@evercore.com.
Evercore Wealth Management, LLC ("EWM") is an investment adviser registered with the U.S. Securities and Exchange Commission under the Investment Advisers Act of 1940. EWM prepared this material for informational purposes only and should not be viewed as advice or recommendations with respect to asset allocation or any particular investment. It is not our intention to state or imply in any manner that past results are an indication of future performance. Future results cannot be guaranteed and a loss of principal may occur. This material does not constitute financial, investment, accounting, tax or legal advice. It does not constitute an offer to buy or sell or a solicitation of any offer to buy or sell any security/instrument, or to participate in any trading strategy. The securities/instruments discussed in this material may not be suitable for all investors. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Specific needs of a client must be reviewed and assessed before determining the proper investment objective and asset allocation which may be adjusted to market circumstances. EWM may make investment decisions for its clients that are different from or inconsistent with the analysis in this report. EWM clients may invest in categories of securities or other instruments not covered in this report. Descriptions provided in this material are not substitutes for disclosure in offering documents for particular investment products. Any specific holdings discussed do not represent all of the securities purchased, sold or recommended by EWM, and the reader should not assume that investments in the companies identified and discussed were or will be profitable. Upon request, we will furnish a list of all securities recommended to clients during the past year. Performance results for individual accounts may vary due to the timing of investments, additions/withdrawals, length of relationship, and size of positions, among other reasons. Prospective investors should perform their own investigation and evaluation of investment options, should ask EWM for additional information if needed, and should consult their own attorney and other advisors. Indices are unmanaged and do not reflect fees or transaction expenses. You cannot invest directly in an index. References to benchmarks or indices are provided for information only. The securities discussed herein were holdings during the quarter. They will not always be the highest performing securities in the portfolio, but rather will have some characteristic of significance relevant to the article (e.g., reported news or event, a new contract, acquisition/divestiture, financing/refinancing, revenue or earnings, changes to management, change in relative valuation, plant strike, product recall, court ruling). EWM obtained this information from multiple sources believed to be reliable as of the date of publication; EWM, however, makes no representations as to the accuracy or completeness of such third party information. Unless otherwise noted, any recommendations, opinions and analysis herein reflect our judgment at the date of this report and are subject to change. EWM has no obligation to update, modify or amend this information or to otherwise notify a reader thereof in the event that any such information becomes outdated, inaccurate, or incomplete. EWM’s Privacy Policy is available upon request. EWM is compensated for the investment advisory services it provides, generally based on a percentage of assets under management. In addition to the investment management fees charged, clients may be responsible for additional expenses, such as brokerage fees, custody fees, and fees and expenses charged by third-party mutual funds, pooled investment vehicles, and third-party managers that may be recommended to clients. A complete description of EWM’s advisory fees is available in Part 2A of EWM’s Form ADV. Trust services are provided by Evercore Trust Company, N.A., a national trust bank regulated by the Office of the Comptroller of the Currency and/or Evercore Trust Company of Delaware, a limited purpose trust company regulated by the Delaware State Bank Commissioner, both affiliates of EWM. Custody services are provided by Evercore Trust Company, N.A. The use of any word or phrase contained herein that could be considered superlative is not intended to imply that EWM is the only firm capable of providing adequate advisory services. This material does not purport to be a complete description of our investment services. This document is prepared for the use of EWM clients and prospective clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of EWM. Any unauthorized use or disclosure is prohibited. The Chartered Financial Analyst and CFA trademarks are the property of CFA Institute. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, Certified Financial Planner™ and CFP® in the U.S.
IRS Circular 230 Disclosure:
Pursuant to IRS Regulations, we inform you that any U.S. Federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for (i) the purpose of avoiding IRS imposed penalties or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. This information is provided for information purposes only and does not constitute financial, investment, tax or legal advice.
©2016 Evercore Wealth Management LLC. All rights reserved.
