Why High-Net-Worth Boomers Should Consider Gifting Their Estates In 2020

The U.S. is on the verge of the largest generational wealth transfer in history. Over the next two decades, millennials are set to inherit $30 trillion from boomers, America’s wealthiest generation. Like almost everything else, the coronavirus pandemic will likely impact this trend. Covid-19 has forced many Americans to think more seriously about their own mortality and the legacy they’ll leave behind.

One of the most pressing issues facing boomers and their heirs today is potential changes to estate tax legislation. As a wealth manager for high-net-worth individuals (HNWIs) over the past several decades, I’ve helped clients navigate changing legislation to make the most of their estates – and I’ve personally seen strategic estate planning make the difference between paying millions in estate taxes or passing that fortune on to your children and grandchildren.

When I first started out in this business, the estate tax exemption was $600,000; if your estate was less than $600,000, you didn’t pay an estate tax, but if your estate was more than $600,000 as an individual (or $1.2 million as a couple), you paid an estate tax of about 55% on all your additional assets. Because it is so substantial, estate tax created a large incentive for people to create trusts instead of wills, as trusts are more dynamic – in the sense that you can change or amend them as you wish. 

A bypass or AB trust, for example, allows married couples to avoid certain estate taxes when one of them passes away. By putting $600,000 in a special trust, a wife could inherit $600,000 from her husband with unlimited exemptions. She could continue to live off of the trust’s income and she could even spend the principal. But if she never spent the principal, that money would go estate tax-free to her heirs, presumably the couple’s children. Utilizing the husband’s exemption, the wife would be able to exclude this money from her estate when her heirs inherit it – at which point, that $600,000 may have grown to several million. 

Over the years, the estate tax exemption number (which is adjusted annually for inflation and cost of living) kept rising, from $600,000 to $5 million. Before 2017, estates valued at less than $5.49 million per person (about $11 million per couple) were exempt from the 40% estate tax. But President Trump more than doubled that exemption when he passed his $2 trillion tax plan, the Tax Cuts and Jobs Act (TCJA) in 2017.

Now, estates up to $11.58 million per person are exempt from estate tax. But this exemption sunsets in 2026, at which point it would return to the pre-TCJA amount, unless the current exemption is reaffirmed by Congress. In today’s political climate, with over 40 million jobs lost and the economy suffering due to Covid-19, it’s less likely that Congress will reaffirm the TCJA’s exemption, which more than halves the number of wealthy estates that are eligible for estate tax. 

As we enter the heat of the 2020 presidential election, today’s large estate tax exemption is not only less likely to extend past 2026; it might not even extend past 2021. During his 2020 presidential campaign, Bernie Sanders proposed a 45% tax on estates valued at just $3.5 million. Now, Sanders and presumptive Democratic presidential nominee Joe Biden have joined forces to outline a new tax plan that would return estate tax exemptions to the historical norm pre-TCJA.

By teaming with Sanders, Biden hopes to appeal to a wider range of Democratic voters. If Biden wins the 2020 election and Democrats take control of the Senate, any ensuing estate tax legislation could extend retroactively to the beginning of the year during which it’s passed. Which means that if you’re a HNWI who believes Biden stands a good chance of winning the presidency, you have from now until December 31 to take advantage of Trump’s estate tax law.

If you have an estate worth more than $11.58 million as an individual (double for a couple), and you’re willing to give money to your heirs during your lifetime (which, in my experience, most people are), and you care about avoiding estate taxes, you may be much better off giving your estate away now. 

Let’s say you and your spouse’s estate is worth $50 million. If you gave $23 million of that money, tax exempt, to your children now (in the form of a direct gift or a trust) and the estate tax exemption drops to $5.5 million per person six months from now, you would have seized the opportunity to move $12 million estate tax-free, over and above the new estate tax exemption amount, which, at a rate of 40%, amounts to $4.8 million in saved taxes. Furthermore, the gift’s future appreciation would also be tax-free. 

HNWIs, particularly if they are relatively late in life and don’t need much of their estate to live, should seriously consider how many millions they might save in estate taxes if they act now. We are very likely on the precipice of a dramatic change; it’s imperative that you consult your estate planners now, to ensure you’re maximizing this window of opportunity for yourself and your family, before it closes for good.

Source: https://www-forbes-com.cdn.ampproject.org/c/s/www.forbes.com/sites/forbesbusinesscouncil/2020/08/06/why-high-net-worth-boomers-should-consider-gifting-their-estates-in-2020/amp/