Wealth Transfer Strategies in Today’s Market
Current market conditions and the federal gift and estate tax laws present wealth transfer opportunities that high net worth individuals may wish to leverage over the near term.
Federal Gift and Estate Tax Exemption at Historical High (Temporarily):
Under the Trump administration’s tax reform, each individual was provided with a lifetime federal gift and estate tax exemption of $11.58M (subject to inflation increases). This is double the amount of exemption than was previously available and historically as high as the exemption has ever been. If there are no changes to the law, the federal gift and estate tax exemption amount is scheduled to sunset after December 31, 2025 and revert back to $5M (plus inflation adjustments) on January 1, 2026. Of course, with the upcoming federal elections, a change in political tides could bring legislative changes sooner than January 1, 2026. In addition to the federal gift tax exemption, each individual may gift up to $15,000 (the federal gift tax exclusion amount) annually to as many people as he or she wishes without using any of his or her federal gift tax exemption. For spousal donors, this means $30,000 per couple, per person, annually, tax-free.
If you are reluctant to make large gifts outright to individuals, trusts may provide a viable option. Making a gift into a trust for the benefit of a family member, rather than outright, can have both tax and non-tax advantages and the majority of individuals tend to use this approach for their large family wealth transfers.
For those who would like to take advantage of the temporarily high federal gift tax exemption before it goes away, but worry about “over-gifting”, a “spousal limited access trust” may be of interest. In general, this involves a gift from one spouse to a trust for the benefit of the other spouse. If properly set up, this type of trust can provide balance and assurances for those who wish to be proactive, but conservative, in their gifting approach if they feel they may need some access to the gifted assets in the future.
Grantor Retained Annuity Trust Planning:
Another powerful gifting strategy in this current down-market, low interest rate environment is a gift to a grantor retained annuity trust (“GRAT”). A GRAT is an irrevocable trust created by a donor who contributes assets to the trust while retaining the right to receive the original value of those assets (plus a modest growth rate) over an annuity period which is the term of the trust - typically a 2 or 3 year period. Due to this structure, the donor uses virtually no federal gift tax exemption in creating the GRAT. However, if over the term of the GRAT, its assets generate a rate of return greater than the modest growth rate referred to above, the appreciation passes to the GRAT remainder beneficiaries (or a continuing trust for their benefit) with no further use of the donor’s federal gift tax exemption upon the expiration of the GRAT term. Presently, more options now exist to take advantage of this strategy using marketable securities.
Consider Extending or Refinancing Intrafamily Loans:
Low interest rates also provide planning opportunities for intrafamily loans, whether refinancing existing loans or extending new loans, which can also be paired with other wealth transfer strategies. These loans can provide the next generation with available funds now at a minimal cost and without the use of lifetime gift tax exemption.
Review Existing Assets and Planning:
Finally, now is a good time to review all of your holdings, including those assets held in entities and trusts, with a particular focus on the tax cost basis of those assets and consult with your attorneys and other advisors as to whether there are any strategies that might be considered to provide for better overall future tax benefit. In this area, there are often nimble strategies that can generate long-term positive tax results.
While there is a lot of uncertainty in the world and volatility in the markets, there is also opportunity for those seeking to be proactive in the near term.