Planning Amid Estate Tax Uncertainty

The lifetime estate tax exemption is set to decrease from its current level — $13.9 million per person — to about half that next year. However, with Republicans taking control of Congress and the White House, some expect that the higher exemption could be extended. David S. Rosen is chair of the tax department at RS&F, a business advisory and CPA firm, and a nationally recognized authority on family office structuring and planning. He offers his perspective on the future of the estate tax:

Is it likely that the current estate tax exemptions will be extended?

The people who believe that the higher estate tax exemption will be included in a new tax bill are saying that if you don’t do that, it’s basically a tax increase, and they’re not trying to increase taxes. Also, the estate tax has an insignificant impact on revenue — it’s less than 1% of the government’s revenue — so there are almost no revenue costs to doing so.

The flipside is that, if you do nothing, the exemption gets cut in half. It’s easier to do nothing than to do something, and doing nothing means we end up with a lower exemption.

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What are the politics of this?

I see a lot of people that seem pretty optimistic that they’re just going to extend all the tax cuts. The Trump administration has communicated that extending the 2017 Tax Cuts and Jobs Act is a legislative priority. Last time it was extended through reconciliation, which would most likely need to be used again.

But this isn’t the first time I’ve been through a tax bill. Until this bill gets talked about in public, we do not know the tone of what they’re trying to accomplish with the tax proposals overall.

One big split in the Republican party has been between the populist and less populist perspectives. The estate tax is one area where Republicans don’t always agree. If the current estate tax continues to grow, it will get to be $30 million per estate ($15 per person — up from $13.9 million per person in 2025). It’s not exactly populist to have a $30 million estate tax exemption.

How should family offices and wealthy families approach this?

This is a complicated time to be an advisor. You’re giving advice with a lot of uncertainty —you’re not in a black and white zone.

My main advice is to engage in planning. If the exemption does go down, you have this year to use your exemption or you will lose it. It doesn’t matter if you’re worth $1 billion or $30 million — that is valuable. It’s not just that you transfer an asset that is worth whatever the exemption is as a gift, but that asset will grow.

The largest issue with the reduction in the estate tax exemption is that it requires you to plan assuming that it will happen — because if it does, you will lose something. But the problem is, we may not know until the end of the year what the exemption will be after 2025.

I’m inclined to advise people to be prepared to make some version of a flexible gift at the end of the year. If it’s a situation where the family might be younger or not ready to use their exemption for some other reason, we can decide whether to engage in the cost of setting everything up so that we can pull the trigger at the end of the year if we have to. At the end of the day, a lot of our tax planning is about creating efficiencies, and losing a $7 million asset is not every efficient. I say $7 million because the exemption would revert to $5 million, which has to be indexed for inflation. It estimated that it will be in the $7 million range (a reduction from $13.9 million).

What structures should families look at?

When working with family offices, everything is family-specific — it becomes custom. But in general, the most common ways for wealthy families to transfer money out of their estate are grantor retained annuity trusts (GRATs) or intentionally defective grantor trusts (IDGTs).

With an IDGT, you have a trust that holds assets for the benefit of the beneficiaries, and the person who made the gift pays the tax. These are often structured with a spousal beneficiary as well. You can have a trust in which the spouse has the ability to receive distributions for their needs, but at the same time, the trust is not included in your estate and benefits your children and grandchildren.

This can accomplish the objective of giving away an asset and being able to maintain control and some cash flow.

As a practical matter, though, for families who are not sure what they want to do, we’re suggesting less complex structures.

About the Author

Margaret Steen

Margaret Steen is the editor of FO Pro, The Family Office Professional. Based in Silicon Valley, she has written for Family Business Magazine for more than 15 years.


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