Donate money now, before inheritance tax laws end in 2025 – Press Enterprise



The holidays are usually a time of giving. But with the new tax laws looming, the end of 2021 could see some very extravagant donations.

The tax bases of a donation

The recipient of a donation does not pay income tax on the donation. However, the donor can pay gift tax, unless one of the two exemptions applies.

The first exemption from tax on gifts is the annual exemption – anyone can give another person a gift of up to $ 15,000 per year. Spouses can together donate $ 30,000 per year. After that, the donation is subject to gift tax and you will need to use the second type of exemption, the lifetime exemption.

Under current law, the inheritance and gift tax exemption is $ 11.7 million per person. You can donate up to the exemption amount while you are alive or on death, or a combination of the two, tax-free. The exemption amount is adjusted each year, and if no changes are made to the law, it will increase to approximately $ 12,060,000 in 2022.

What could change?

The current inheritance tax and gift exemption law will expire in 2025, and the amount of the exemption will drop back to the $ 5 million ceiling of the previous law, which, when adjusted for inflation, should be around $ 6.2 million.

The Build Back Better bill that circled in Congress included a provision that would speed up the sunset clause so that the exemption drops to $ 6 million on January 1, 2022. As a result, estate planning lawyers have rushed to the table. to get plans. in place for clients to use the full inheritance / gift tax exemption available in 2021 in the event of a disappearance.

But then, on October 29, 2021, President Biden presented a “framework” for an amended bill that eliminated that change, leaving the current law to expire in 2025. The framework also eliminated provisions that would have destroyed many techniques. used by high-net networks. -value taxpayers to transfer wealth to younger generations without incurring gift or inheritance rights.

Estate planning lawyers could breathe again. But not for long.

Who should act

If your net worth is less than $ 6 million (or $ 12 million for a married couple), you might not have to worry about inheritance taxes. That is, unless the exemption drops even lower – as Senator Bernie Sanders and others would like.

For those whose estates will likely exceed $ 6 million per spouse, especially those whose assets are at risk of greatly appreciating, the time to act is now.

What is the problem and why now?

In simplified terms, let’s assume that Harry and Neta Williams (HNW) have a combined net worth of $ 30 million. If they do nothing and live past 2025, they could have a taxable estate of $ 18 million ($ 30 million minus $ 12 million in exemptions). At a 40% tax rate, that works out to a tax bill of $ 7.2 million.

If HNW had instead donated the maximum of $ 23.4 million currently under the current exemption, their taxable estate would only be $ 6.6 million, which would result in a tax bill of 2 $ 520,000, a saving of nearly $ 5 million in taxes. This is true even if they die in a year when the exemption is lower than it was at the time of their donation.

The inheritance / gift tax exemption is, in essence, a “use it or lose it” proposition. We have the highest inheritance tax exemption we have had since inheritance taxes were created. If it goes down before you use the full exemption amount, it is no longer available.

Gift transfer techniques

You might be thinking that HNW doesn’t want to give two-thirds of their net worth to their kids just to avoid $ 5 million in estate taxes. And it may be true. You might also think that the $ 2.5 million in taxes, even after their generous donations, is too much tax. This can also be true. And that’s why estate planners are so busy.

There are techniques that can be used to leverage donations, ensure a flow of income to the donor, and even keep the donor in control of certain assets. Some of these techniques are

Discounted gifts: When assets are transferred to an entity (usually a limited partnership or limited liability company), a donation of a minority stake in that entity is usually given a present value due to a lack of control and negotiability, thus allowing the donor to do more while using less of their exemption.

Annuity trusts kept by the settlor: This is a type of trust to which the donor transfers assets and retains a payment right over a period of time. At maturity, the beneficiaries receive the asset and all of the capital gain. The donor also pays income tax on the income from the assets of the trust, which allows for another tax-free transfer of assets.

Sales to Intentionally Defective Transferor Trusts: The donor creates a trust, donates some assets, and then sells other assets to that trust in exchange for a promissory note. Done well, there is a minimum donation, there is no gain on the sale (for tax purposes, it is as if the donor had sold the property), the donor pays tax on the income and surplus value is transferred to the next generation.

All of these techniques have been and likely will continue to be considered by Congress, so now is the time to act even though the Build Back Better Act makes no changes to the estate tax.

The best giving plan is often one that can be executed over time. At the very least, we know that the inheritance and gift tax exemption will drop significantly in 2026, and it’s not very far.

Teresa J. Rhyne is an estate planning and trust administration lawyer in Riverside and Paso Robles. She is also the New York Times No. 1 bestselling author of “The Dog Lived (and So Will I)” and “Poppy in The Wild”. Contact her at [email protected]


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