It’s Worth It Episode 2: Should You Take advantage of your Gift Tax Exemption in 2020?

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On this episode of Worth It, Associate Daniel W. Hatten and Partner Lindsay A. Rehns will discuss whether customers should take advantage of their lifetime gift tax exemptions before the end of 2020. As part of this podcast discussion, Dan and Lindsay will explain some details about the lifelong gift tax exemptions, highlight some of the possible tax ramifications of the upcoming elections, and finally explain why now is actually a good time to see the rest of the Use tax exemption for lifetime gift taxes.

Dan had: Hello and welcome to Worth It, a podcast from Proskauer’s Private Client Services Group that covers a wide range of topics related to estate planning, wealth transfers, and major legal developments, as well as other issues our clients frequently face when organizing their estates . My name is Dan Hatten, and I work in Proskauer’s New York office. In this episode, we’ll discuss whether customers should use their federal exemption for lifelong gift taxes by the end of 2020. As part of this discussion, we’re going to cover a little bit about lifelong gift tax exemptions, highlighting some of the potential tax ramifications of the upcoming elections and ultimately explaining why now is actually a good time for customers to take advantage of the rest of their lifelong gift tax exemptions. This episode is joined by Lindsay Rehns, partner in Proskauer’s office in Boca Raton.

Lindsay Rehns: Hi Dan. I am glad to be here and look forward to speaking with you on this timely topic.

Dan had: As a background, Lindsay, could you please give a brief explanation on the tax exemption for federal gifts for life starting today in 2020?

Lindsay Rehns: Sure, but first I think it makes sense to give a little background on federal gift and estate taxes. Therefore, gratuitous transfers from US persons, whether by gift or transfers that take effect upon death, are taxed at a rate of 40%. It is the lifelong gift and estate tax exemption that essentially shields a certain amount from that 40% tax the federal government levies on lifelong gifts or remittances upon death.

Dan had: And you call this a shield. How much can a certain person shield in 2020?

Lindsay Rehns: Well, in 2020, lifetime gift and estate tax exemption is $ 11,580,000 for each person. This means that a single person can transfer US $ 11,580,000 by gift or death and spouses can jointly send US $ 23,160,000 by gift or death without being subject to 40% gift and inheritance tax.

Dan had: There are many exceptions. Will this always be available to US people?

Lindsay Rehns: The short answer Dan is no. The lifelong gift and estate tax exemption is provided by law, and the law provides that the amount of the inflation exemption increased by around $ 5 million each year from 2011 to 2017. In 2018, the lifetime gift tax exemption was effectively doubled to over $ 11 million. Currently, the law provides that the exemption will continue to increase from a base of $ 11 million annually through December 31, 2025. However, this elevated base is expected to expire on December 31, 2025 and revert to its pre-2018 base.

Dan had: And is it possible that the upcoming elections will have an impact on the lifelong gift tax exemption?

Lindsay Rehns: Obviously there is a lot of uncertainty as we head for the November elections. It is clear, however, that Vice President Biden could and could attempt to change the lifetime exemption back to the pre-2018 basis. In this case, we believe the lifelong gift tax exemption will be reduced to approximately $ 5,900,000. However, the Trump administration has made it clear that individuals using the current exemption at the increased amount will not be subject to clawback. This means that we may find ourselves in a usage situation or lose it due to the increased exemption from lifelong gift tax. Of course, there is a risk that a change in the law in a Biden administration could either further reduce the exemption or be retroactive to 2020. Both options increase the urgency for customers to take advantage of their available lifetime gift tax exemptions as quickly as possible.

Dan had: Wow, this possible change under a Biden administration sounds like a big change. What do you advise your customers to do before the end of the year this year?

Lindsay Rehns: Well, we advise customers to consider taking advantage of their lifetime gift tax exemptions through the end of the year by giving gifts to long term trusts for the customer’s descendants and in some cases the customer’s spouse and descendants.

Dan had: Does this advice apply if President Trump wins re-election on November 3rd?

Lindsay Rehns: Yes, this advice would apply regardless of what happens on November 3rd as we know that the increased exemption is currently scheduled to last until sunset in late 2025. In addition, it is almost always beneficial for customers to use their exemptions on gifts for life versus transfers on death for several reasons. First, a lifelong gift removes the appreciation of the gifted asset from the client’s taxable estate. Second, a lifelong gift often minimizes applicable state transfer taxes, as few states levy a separate gift tax. and third, a trust that a customer creates during their lifetime may be a “grantor trust,” which allows the customer to pay income tax on the trust’s assets each year without that income tax payment being an additional gift. By paying the trust’s income taxes each year, the client is giving the trust an extra tax-free gift that allows the trust to grow faster while reducing the client’s estate even further.

Dan had: Thanks for that. It sounds like it is definitely important for customers to consider their remaining lifetime gift tax exemption until the end of 2020, regardless of what happens in the elections. Before we get into closing, I wanted to check to see if there are any specific techniques that you are recommending for customers often this year to use the remaining exception.

Lindsay Rehns: Absolutely. In addition to the usual advice we give on gifting clients with assets that the client believes they will appreciate, we often suggest that married couples create two separate SLATs, which stand for lifelong spouse access trusts.

Dan had: We’ll go into more detail on SLATs in a separate podcast. Can you briefly explain how SLATs work?

Lindsay Rehns: For sure. As a preview in a SLAT plan, Spouse A would create a trust for the benefit of Spouse B and his or her offspring. While Spouse B would create a separate trust in favor of Spouse A and his descendants. There must always be some differences between these two trusts to avoid what is known as the “mutual trust doctrine”, but in general the beneficiaries would be similar. This type of plan gives customers more flexibility in the future should they ever need to provide “access” to the assets. While the gifted fortune ideally remains in the trust and grows for the benefit of the couple’s offspring through the use of SLATs, it is possible for either spouse to access the fortune of the trust for which he or she is a beneficiary.

Dan had: Thank you for this helpful explanation and thank you for coming to me today, Lindsay. Sounds important so customers can take advantage of their remaining lifetime exemption before the end of the year, and customers may even be able to do so while retaining some access to the gift’s assets using the SLAT plan.

Lindsay Rehns: That’s right and it was a pleasure to be here today. I hope our listeners found the topic helpful, insightful, and inspiring. If you have any further questions, please feel free to contact us to discuss them.

Dan had: With that we will conclude this episode of Worth It. We hope you enjoyed this podcast and visit us for future episodes. If you would like to receive notifications when new episodes are available, please visit our website and click the subscription button for our publication link at the bottom of any page. Thank you for listening!

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