Is That Window Closing?

What a strange time we are in: Shut in, doors closed, and working almost exclusively electronically. That doesn’t mean we don’t need to keep an eye on what’s going on outside. In fact, there is a window that may be closing soon. What’s the window?

It is an opportunity to transfer $23M (and quite a bit more with proper planning) without any transfer tax*. This may seem like it only applies to a small group of folks who have accumulated a substantial amount of wealth. But in these uncertain times we don’t really know who might be affected. More on this in a minute.

First things first. Why is it a window and not a door? Well in the terminology, a door is a more permanent way to move in and out of something, and the current estate tax exemption was never permanent; when it was created it was set to automatically expire December 31, 2025, which is often referred to as sunsetting. So that’s as good a reason to refer to it as a window as any, right?

But this is 2020, not 2025, so why are we talking about this window closing now? The big reason is that Federal and State governments need more money and the quickest way to find, more money is to raise taxes. Not many think that the current, very generous transfer tax credit is going to survive until the end of 2025. And estate and gift taxes are easy to raise. They only apply to the super wealthy, right?

Not so fast. I represent a lot of small business owners. They have worked hard and done well. While they don’t have hundreds of millions they do have estates that exceed or with time will exceed $7M. You see, we don’t know what the transfer tax exemption might be rolled back to. Best guess? $3.5M or $5M per person.

First of all, I aways stress that taxes are the tail and the tail shouldn’t wag the dog.

Gift transfers should be of excess wealth, not wealth you may need to support your lifestyle. But if you have excess wealth, transferring it without transfer taxes preserves the greatest amount for our families and the gifts don’t have to be outright. They can be in trusts that will provide benefits when and where you want them.

Estate planning is about arranging our assets for use during our lifetime and to provide for an orderly transfer when the time is right. With so much uncertainty today, now is a very good time to review your current estate, your wealth footprint and your wealth transition plans.

*The 2017 Jobs and Tax Act raised the federal transfer tax exemption to $11.18M per individual beginning in 2018. With cost of living increases that amount has reached $11.58M in 2020. The husband and wife combined credit is $23.16M.