President Joe Biden is considering changing the federal estate tax by, among other things, reducing the estate tax exemption (now $11.7 million). While that would not affect many Americans, it would hit wealthy families. Assuming the Biden plan, or something similar, is approved by Congress, and that the measure impacts you, what’s the best way to handle that? We asked tax expert Bruce Bell, an attorney at the Chicago office of Schoenberg Finkel Beederman Bell Glazer. His thoughts:
Larry Light: One stratagem is to shrink the size of your estate by giving pieces of it to loved ones while you’re alive. Given the possibility that the federal estate tax exemption will decrease, should you make gifts now before the law changes?
Bruce Bell: Depending on the amount of the gifts you make, a 2021 gift could provide an overall tax benefit. A gift of some or all the current $11.7 million estate tax exemption will be beneficial only if it exceeds the future decreased estate tax exemption. If the gift is less, it will not serve the purpose.
Light: What’s an example of what to do?
Bell: Assume Allison has $20 million of assets in her estate. She makes a $5 million gift to her children in 2021. Then suppose the federal exemption decreases to $6 million in 2022 from $11.7 million this year. Her $5 million gift can be applied against the $6 million exemption, leaving Allison with a $1 million exemption for future gifts—and that’s useable during her lifetime or upon her death.
A better idea is to use up as much as possible of the current $11.7 million this year. If instead, Allison makes gifts of $10 million in 2021 and the exemption decreases to $6 million in 2022, she used up her 2022 $6 million exemption but won’t be taxed on the $4 million of gifts she made in 2021 that exceed the 2022 exemption. The bottom line is that to take advantage of the decreasing exemption, the 2021 gift should be more than the 2022 exemption, whatever the amount turns out to be.
Light: What’s the outlook for congressional action?
Bell: No details have emerged at this time. Despite the uncertainty, many high-net worth individuals are making gifts to younger generation family members while the $11.7 million historically high estate tax exemption is in place. The thinking is that Congress will follow the IRS position that any gifts made under the current exemption won’t be taxed retroactively if the exemption decreases.
The talk from Capitol Hill is that the exemption could be reduced to somewhere in the $5 million to $6 million range. Some proposals, however, go as low as $1 million.
Light: What’s another strategy to take advantage of the current high level?
Bell: Not splitting gifts between spouses. Married couples can elect to split gifts treating the gifts as made one-half by each. If Allison makes a $10 million gift in 2022, she and husband Andrew joins in the gift, the couple can be treated as if they each made a $5 million gift. So if the exemption drops to $6 million in 2022, each of the two of them will have only $1 million of exemption left. But if Allison and Andrew do not split the gift, Allison will have no exemption left in 2022 but Andrew will have his full $6 million of exemption remaining. By not electing to split the gift, the couple has an additional $4 million of remaining exemption.
Light: Income taxes are a factor to be reckoned with, right?
Bell: Yes. Let’s say you inherit your deceased parent’s assets, in this case a house, then sell it. You don’t have to pay capital gains tax on the difference between the purchase price paid decades ago and your selling price today. You will be taxed only on the extra amount the house gained in value from when your parent died and you sold the place. A much smaller amount.
Light: But the calculation is different if that the parent, while alive, gives you the house?
Bell: Correct. If these same appreciated assets are transferred during the donor’s lifetime by gift, the beneficiary will pay capital gains taxes based on the difference between the sale price and what the donor paid years ago.
How To Gift Assets Before The Pending Biden Tax Plan - Forbes
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