The lifetime estate and gift tax exclusion continues to increase, and in 2023 is set to be at an all-time high amount of $12.92 million. However, the exclusion is scheduled to decrease significantly down to an estimated $6.845 million in 2026. Proper planning is necessary to ensure that you are taking full advantage of the highest tax exclusion and are not negatively affected when the decrease occurs in 2026. Keep in mind that this is an ever-changing situation, and election results in 2024 or other legislative changes could affect the planned exclusion rate decrease or determine legality of various types of estate planning options. It is best to discuss with your CPA and Estate planning attorney sooner rather than later.
To Gift or Not to Gift?
For some with sizable estates, now may be the best time to make meaningful gifts, there are several factors to consider first when making this decision and consulting with your CPA.
- Can you afford to give away a significant amount in order to take advantage of the increased tax exclusion?
- What and how much should you gift?
- Are your beneficiaries ready to receive the gifts or should there be controls in place around the gift (typically trusts)?
If you decide to move forward with a gift, there may be multiple options available to you.
One way to transfer wealth is through the establishment of a trust. A common trust that can be taken advantage of is the Spousal Lifetime Access Trust (SLAT). Through the SLAT, your spouse will receive distributions from the trust if that added flexibility is needed. Proper planning and drafting to ensure the legitimacy of the trust is needed.
Another trust option, where the trust cash flow is not needed, is a trust for the benefit of a non-spouse (child or grandchild). There are multiple ways that a trust of this nature can be setup including the ability to continue to have the trust owned assets, income tax consequences fall on the original trust creator. This payment of tax on the trust owned assets reduces the trust creator’s estate and the payment does not register as a gift to the trust heirs.
What to Gift
Some individuals with the level of wealth to take advantage of these large tax exclusions have the bulk of their wealth tied up in business ownership. In this case, it may be an option to gift business interest in trust for a donee or outright to a donee. As a part of the gift of business interest, certain discounts may be available for lack of marketability and/or lack of control. Such discounts would reduce the amount of lifetime exclusion that is used up upon gifting.
Methodologies to determine the fair market value of the business interest should adhere to applicable Internal Revenue Rulings and Procedures. In most cases, a valuation of the business interest that is performed by a “qualified” appraiser, using a method that the IRS approves of, will become support to a gift tax filing.
Olsen Thielen has a team of experts in Business Valuation that can assist with valuing business interest.
Individuals with significant brokerage accounts could gift securities to a trust for a donee or outright to a donee. If publicly traded, the support for fair market value on the date of transfer is simple to determine. You will want to watch the basis in the securities being gifted as the donee steps into the shoes of the donor for basis purposes. It may be advantageous to hold low basis securities for the step up in basis as of the owner’s death. Some trusts may provide an option to later substitute assets owned within the trust with personal assets to take advantage of the basis step up.
An additional option for gifting is the ability to gift property. Typically, a property appraisal needs to be completed to substantiate the fair market value as of the date of death. You will want to watch the basis in the property being gifted as the donee steps into the shoes of the donor for basis purposes. It may be advantageous to hold low basis property for the step up in basis as of the owner’s death. Some trusts may provide an option to later substitute assets owned within the trust with personal assets to take advantage of the basis step up.
How Olsen Thielen Can Help
Olsen Thielen can help you throughout this process – determining if and how gifts should be made, provide consultation on the trusts that are being contemplated, ultimately helping with compliance items around the funding of the trust, etc. Our tax experts can assist you with the review of the estate plan, as well as helping interpret trust documents or wills.
Begin planning now to take advantage of the high gift and estate tax exclusions while the opportunity is still available.