Congress has revised the tax law many times in the last two decades, with the TCJA (tax cuts and jobs act) being the most significant and comprehensive change in the tax law. You must consider the potential imposition of the federal estate tax, even if your estate is apparently not subject to that tax in the current tax year. Your estate could increase significantly due to an unforeseen event. Your marital status could change due to marriage, divorce, or the death of his or her spouse. Given that the TCJA sunsets after 2025 and that political risk is always a potential concern, the law may change and provide for a less or more generous exemption from the federal estate tax. You must ask if making full use of the unlimited marital deduction makes sense because the marital deduction only defers estate tax. If the basic exclusion amount is insufficient to avoid all estate taxes, you should consider strategies such as lifetime gifts to take advantage of the annual exclusion from taxable gifts. For 2020, the annual exclusion amount for gifts of present interests is $15,000, indexed annually for inflation
Multigenerational wealth planning requires a well thought out process, the biggest challenges to wealth transfer planning among high net worth clients are discomfort with sharing financial information with children, inexperience with multigenerational wealth strategies, and fear that the children are not prepared to inherit the wealth. The shift in wealth that is reshaping the wealth management landscape over the next quarter century and with a current top rate of 40%, the estate tax can take a bite out of your lifetime savings. A properly structured program can remove assets from your estate to reduce the tax exposure. Proceeds will pass tax-free to the heir, creating a greater legacy.
Recent estate tax law changes have significantly increased the federal estate and gift tax lifetime exclusion amount to very high thresholds:
- $11.58 million per individual (up from $11.4 million in 2019), and $23.16 million per married couple.
- Interspousal transfers: gifts and bequests (during your lifetime or upon death) between spouses are unlimited (to citizen spouse).
- Portability of unused exemption to surviving spouse: Beyond that, if the first-to-die spouse’s exemption amount is not fully utilized, an election on that estate tax return will preserve the remaining unused exemption amount for the second-to-die spouse.