Opportunities to transfer wealth at lower transfer tax costs ebb and flow. Currently, we are in a favorable environment to make wealth transfers at lower transfer tax costs.

The Tax Cuts and Jobs Act of 2017 temporarily doubled the estate, gift, and generation-skipping transfer tax exemption from $5 million, adjusted for inflation, to $10 million, adjusted for inflation. In 2020, the inflation-adjusted exemption amount is $11,580,000 per person. This increase is scheduled to expire at the end of 2025. After that, the exemption for estate, gift, and generation-skipping transfer tax, will revert back to $5 million, adjusted for inflation.

The last time an increased gift, estate, and generation transfer tax exemption was set to expire, (at the end of 2012). There was speculation as to whether there would be a claw back of the exemption used based on the higher exemption. The IRS has issued regulations on this point which clarifies that gifts made now using the increased exemption will not be subject to gift or estate tax later on when the exemption reverts to the lower amount. This is very good news. So, gifts made based on the higher exemption prior to January 1, 2026 will not be subject to claw back of tax based on the later lower exemption.

The current low interest rate environment also is favorable for making wealth transfers at reduced costs. As the rates are low, clients who have intra-family loans may wish to renegotiate the interest rates in the terms of the loans. Clients may also wish to engage in other transfer strategies that are tied to interest rates, such as grantor retained annuity trust and sales to intentionally defective grantor trusts with a promissory note. These two techniques are useful in succession planning for family-owned businesses.

No Insight would be complete without making reference to the SECURE Act, which reduced the ability of an IRA beneficiary to make an election to take the payout over the beneficiary’s lifetime. Now the election is limited to 10 years. Some clients have IRAs payable to their trust relying on the prior rule. For those clients, they should have their estate plan reviewed.