Today There's a $22 Million Lifetime Gift Tax Exclusion - Your Clients Can Use It Or Lose It
A successful sale typically has three common elements: It solves a large problem. The solution itself is time-limited, meaning that if you don't take action soon, all will be lost. And it's a story that you can honestly get passionate about because it's so important to the client.
The Tax Cuts and Jobs Act of 2017 created that exact scenario. Beginning in 2018 and lasting through 2025, the U.S. has dramatically increased the amount of money/assets that individuals can gift to non-charitable entities without being subject to federal gift taxes. Any client who had maximized their gift-tax exempt transfers in 2017, woke up in 2018 with an additional $5,490,000 ($10,980,000 for married couples) that could be transferred out of their estate without gift tax ramifications. And even better, that amount was indexed for inflation so that every year thereafter they can transfer that indexed increase as well. In less technical jargon, use it or lose it because, if you woke up in 2026 and had not used this governmental largesse, your lifetime gift-tax-exempt transfer limits would now revert back to the original 2017 level, indexed for inflation. The chart below illustrates the impact of the change:
With all new laws, there are issues created that need to be resolved and this legislation was no different. The law left open the possibility that a gift that previously took advantage of the increased exemption amount would be subject to estate tax upon the donor's death, or "clawed back" into the taxable estate. This would occur if the estate tax exemption applicable at the donor's death were lower than the exemption amount at the time of the gift. Under the proposed new rules, if an individual makes a gift taking advantage of the increased exemption amount between January 1, 2018 and December 31, 2025, the exemption amount used in calculating the federal tax payable on the aggregate of the individual's lifetime gifts and taxable estate will be the greater of (i) the exemption amount at the time of the individual's death or (ii) the portion of the increased exemption amount previously applied to lifetime gifts.
Clients have an abundance of estate planning tools that are available to minimize wealth transfer taxes, but they all begin with taking advantage of the seven year window that can be closed by new legislation at any time with little to no warning. Some key questions you might ask that can guide your client into exploring those options include:
"Assuming you made gift tax exempt transfers to an irrevocable trust, how important is it that you or your spouse retain access to some of the income generated by that trust?" You can accomplish that with a spousal lifetime access trust (SLAT).
"Assuming you made gift-tax-exempt transfers to an irrevocable trust, and you could personally pay the trust's income taxes without having it counted as an additional gift, would that be attractive?" The solution is an irrevocable trust that is defective for income tax purposes (IDIT).
"Assuming you could supplement the money gifted to the trust with loans at below market rates with the loan interest not taxable to you, would that be attractive?" That's called a gift and loan to an IDIT.
And finally, how important is it that some of the assets in the trust have guaranteed future returns at competitive interest rates?
Doing nothing can ultimately cost clients 40¢ on every $1 that is not transferred and removed from the taxable estate.
Doing nothing keeps the next 20, 30, 40 years of appreciation on the assets retained in the estate, costing heirs even more.
So let the conversation with your client begin.
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