Chasing the Sunset: Take Advantage of Wealth Transfer Opportunities prior to 2017 Estate Tax Cut Expiration

October 26, 2023

Wealthy American families are rushing to relinquish wealth before the end of 2025 when Trump’s 2017 estate tax cuts are set to expire. Families with a net worth of approximately $10 million or higher are working with their advisors to find opportunities to make tax-free transfers in order to remove assets from their estates.

The Changing Landscape of Estate Taxes

In 2017, Trump doubled the estate tax exemption, and it is currently almost $13 million per person or $26 million per couple. However, the legislation included a sunset provision where the exemption will go back down to where it was prior to 2017.  Accounting for inflation, the number most mentioned for the “sunset” is $7 million per person or $14 million per couple.

Strategies for Asset Protection

So, individuals and couples are scrambling to find ways to protect their assets from the estate tax prior to the end of 2025. The goal is to give away outright or in trusts, assets over $7 million or $14 million for individuals and couples, respectively. For example, if a couple who transfers the full exemption amount of $28 million out of their estate before the sunset, their estate will get a $5.6 million estate tax savings when they both die. If the transfers or gifts are made to their grandchildren, in the form of generation skipping gifts, the savings would be almost $9 million.

Navigating Gift Tax Regulations

The easiest way to reduce an estate is through lifetime direct gifts. These gifts can be cash, securities, real estate, etc. Currently, an individual can give $17,000 to any individual with no tax consequences. For any gift over $17 thousand each year, a gift tax must be filed indicating the amount over $17 thousand of the gift. Although a gift tax is filed, taxes will not be owed at the time of the gift. The IRS uses gift tax returns to track lifetime gifts over the exemption in estate tax calculations at death.

Dynasty Trusts and Asset Protection

Ohio law allows dynasty trusts where assets are removed from the estate of individuals and then their heirs. Assets are gifted to trusts enabling assets to grow estate tax free indefinitely down their generations. The assets can also be protected from creditors and unfavorable spouses.

Uncertainty Surrounding Estate Tax Laws

Although under current law, the tax cuts are to go away, it’s not 100% certain that the cuts won’t be extended by Congress. Republicans favor abolishing the estate tax all together. Democrats, on the other hand, would like to drop the estate tax exemption even more. It’s easy tax money for the federal government. Ohio, with a Republican majority in the legislature, has abolished the state estate tax altogether.

Considerations for Wealthy Individuals and Couples

However, the assumption is that the exemption amount will go down under the current law language. It would be a big gamble to ignore the high probability of the exemption being reduced significantly. Individuals and couples are wondering how much they should give away.  Trusted advisors can help analyze income, expenses, lifestyle maintenance, etc. and keeping the effects of inflation and volatile markets in mind.

KJK’s Estate, Wealth & Succession Planning partner Susan Friedman (SLF@kjk.com; 216.736.7272) is well-equipped to guide clients through various estate planning options, including considerations related wealth transfer opportunities. This ensures that individuals have a comprehensive understanding of their choices when it comes to safeguarding their assets and providing for future generations.