There are formidable proposed estate tax law changes coming out of Washington. We believe that, if passed, the law will be enacted in 2022, but it may happen as soon as October of this year. If so, the window is closing on your opportunity to control your taxes. An analogy that I have used with my clients is that you would not wait to schedule dinner plans the week of Valentine’s Day if you wanted to get into the best restaurant in town. The same can be said with the best planners, valuation firms and lawyers—a new plan can take two to three months to finalize, or longer.
Under current law, the federal estate tax exemption amount for 2021 is $11.7 million per individual, but only until Jan. 1, 2026, when the exemption amounts will retroactively be placed back to where they were prior to the tax law changes of 2018. That amount doubles for a married couple. So, if a husband and wife with assets of $23.4 million both died in 2021, their estate would not be subject to federal estate tax. Any amount over the exemption would be taxed at a 40% rate. The Biden administration has proposed an immediate reduction in the estate and Goods and Services Tax (GST) exemptions to $3.5 million per individual or $7 million for a married couple.
Use it now, or risk losing half of your exemption: High net worth individuals should consider making a strategic gift in 2021 before the law changes. I believe that the rules will not be retroactive; therefore, if you were considering gifting, it would be beneficial to make a gift this year before you potentially lose half of your exemption.
Ways to maximize your exemption: Consider transferring minority interests in family-controlled entities and interests. This can be achieved by creating two sets of share classes, where one set of shares (A shares) controls the income and votes while the B shares hold value but are unable to affect major decisions. Once the different share classes are created, the A shareholder typically feels much more comfortable gifting shares of their business to family or management.
When you are gifting to a minority shareholder, you are allowed to discount your stock anywhere from 20% to 35%. The reason you are able to do this is because the lack of marketability and control of the stock. So, an asset worth $50 million can be valued at possibly $32.5 million for estate planning purposes. This will go a long way in assisting in the transferring of assets out of the federal estate tax system. The proposed tax law is considering reducing discounting to minority shareholders altogether or reducing it by 50% —another reason to consider planning now.
The federal gift and estate tax exemption is currently the highest it has been since the tax was enacted more than 100 years ago. Pres. Joe Biden has proposed drastically changing the estate tax in order to raise revenue for his infrastructure plans. I believe the time to start exploring the benefits of planning is now, before any proposed taxes can be passed by Congress or pushed through during reconciliation in October.