I’ll be the one to come out and say what many of us are thinking…
I’m not a big fan of the federal estate and gift tax exemption rules! The exemption is currently $12.92 million per person, adjusting for inflation each year, and then dropping in half when the clock hits midnight the night of December 31, 2025. Cinderella! Cinderella!
Ability to Plan
How can we possibly plan for our clients when we don’t know whether each unmarried client will have roughly $15 million of exemption versus roughly $7.5 million of exemption, or if each married client will have roughly $30 million of exemption versus roughly $15 million of exemption?
The differences in either case are huge and they can make a big difference in our approach to planning for clients who have net worths in these ranges.
If we think a client will have a taxable estate at death, then we are likely to advise them to make gifts. However, if we think a client will not have a taxable estate at death, then we are likely to advise them not to make gifts because of the loss of step-up in income tax basis without a corresponding estate tax reduction.
And how much life insurance should they purchase to cover estate taxes when the differences between dying on or before December 31, 2025 and on or after January 1, 2026 are so great.
Then factor in the odds that the estate and gift tax exemption rules may or may not be extended past 2025 and we might as well flip a coin when deciding the right approach! [Please note the obvious sarcasm. Please don’t actually flip a coin.]
Compare to Income Tax Rules
Every year, I feel relatively comfortable that the income tax brackets and deductions approximately grow for inflation. Yes, a tax act may expire or a new Congress and President may change the tax rates by a few percentage points and modify the brackets a bit. But these changes aren’t generally severe, at least in my opinion. I’m not saying I always like them, but I at least find them tolerable and I can plan for them.
The federal estate and gift tax rules used to be similar in this regard. When I graduated from law school in 1994, the exemption was $600,000. The exemption grew a little bit at a time, and then the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) raised the exemption from $675,000 in 2001 to $1 million in 2002 and to $3.5 million in a series of steps through 2009. That was somewhat workable except that we had to deal with a “fiscal cliff” and whole lot of other estate tax exemption drama thereafter.
Good for Business
All of this uncertainty is good for business if you’re an estate planner. However, it’s bad for our clients which is what really matters.
I love that this encourages our ultra-high-net-worth clients to make gifts since they should be doing so irrespective of these changes. This creates a lot of gifting trusts for us to prepare which is great for us and great for our clients.
But none of us can feel good about helping our clients make large gifts where they wouldn’t and shouldn’t have made them but for their fear of missing out on the gifting opportunity.
If you found this article interesting, you might also be interested in these other educational programs and products by Steve Oshins:
- The Spousal Lifetime Access Trust: A Gifting and Creditor Protection Technique
- Fear Factor: “Protecting Assets by Getting into the Creditor’s Head and Controlling His Mind”
- 2023 Trust Decanting Update
- Fixing Old “B” Trusts
- Trust Situs After Kaestner: Saving State Income Taxes Using Non-Grantor Trusts
- The NING Trust: Saving Significant State Income Taxes for Your Clients in High State Income Tax Jurisdictions
- DINGs and NINGs: Technical and Planning Issues
- Steve’s FREE State Rankings Charts
ABOUT THE AUTHOR
Steve Oshins, AEP (Distinguished) is a member of the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada. He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011. He was named one of the 24 “Elite Estate Planning Attorneys” and the “Top Estate Planning Attorney of 2018” by The Wealth Advisor and one of the Top 100 Attorneys in Worth. He is listed in The Best Lawyers in America® which also named him Las Vegas Trusts and Estates/Tax Law Lawyer of the Year in 2012, 2015, 2016, 2018, 2020, 2022 and 2024. He can be reached at 702-341-6000, ext. 2 or firstname.lastname@example.org. His law firm’s website is www.oshins.com