In spite of fluctuating exemption limits, there may be some ways to improve the efficiency of your estate plan. Consider an annual gift opportunity and taking advantage of current low interest rates.

Wealth transfer

Use It or Lose It: Opportunities in Gift Planning

  • Craig J. Ruffolo
  • David White
  • 8/13/2021

Key insights

  • The lifetime estate tax exemption has changed dramatically over time, and can be tricky to incorporate into a long-term financial plan.
  • Once a year, an individual can give $15,000 (each) to any number of individuals and not have it count against the lifetime gift and estate tax exemption.
  • Currently, low interest rates may allow you to leverage alternate strategies such as loans and trusts.
  • Assemble a team of professionals to help implement an effective estate gifting strategy.

Want to discuss strategies that can help improve your financial plan?

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The potential for change in various tax rates is heightening the awareness of estate taxes and raising questions about gifting strategies for families. Low interest rates and, in some cases, lower asset values caused by current events have created a real opportunity to transfer wealth in gift planning. While there are many strategies that work in life and at death, there is one that if you don’t use it now, you lose it.

Smaller gifts can add up

As of 2021, the estate tax exemption, or the amount a person can transfer at death without incurring federal estate taxes, is $11.7 million. A person can choose to wait until death to bequeath it, or give that amount to family during their lifetime.

Some families may be concerned with changes to the amount of this exemption. Just 15 years ago, that amount was only $2 million. And even if Congress doesn’t enact any changes in the next few years, the lifetime exemption is set to revert to $5 million (adjusted for inflation) in 2026.

However, on a smaller scale, any individual can give $15,000 to any number of individuals every year and not have it count against the lifetime gift and estate tax exemption. This gift opportunity can add up quickly, but if it isn’t used during a given year, it is lost.

For example: a married couple has two adult children who are themselves are married with one child. Spouse 1 can give $15,000 to each of the three people in each family — thereby gifting a total of $90,000 a year. Spouse 2 can give the same amount, for a grand annual total of $180,000. Used as an intentional strategy over 15 years, that family could shift an additional $2.7 million outside their estates, regardless of changes to the gift and estate tax exemption.

Low interest rates can strengthen your plan

Each month, the IRS publishes minimum interest rates applicable to loans (AFR or applicable federal rate) and discount rates applicable to remainder interests and life estates. These rates are still very low (1.2% in June 2021 compared to 0.6% in December 2020), which means you could have the opportunity to do some impactful planning.

The $15,000 yearly gift opportunity coupled with lower interest rates allows planners to leverage strategies like grantor retained annuity trusts (GRAT), intentionally defective grantor trusts, intra-family loans, and spousal lifetime access trusts.

Learning your options and associated risks is the first step in implementing an intentional gifting strategy for any family. The next step is to connect an advisory team of tax professionals and financial planners with your family attorney to help develop a comprehensive plan. Review your plan each year to make sure it’s still appropriate — tax laws are constantly changing, along with your family’s financial situation.

How we can help

The circumstances that surround gift planning are currently favorable, but may not last long, so see if you can use it, not lose it. CLA creates a seamless experience when our tax and wealth advisory professionals work together to deliver opportunities to you. We help you develop a tax planning strategy, integrate those strategies into a goals-based financial plan, and align your investment management.

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  • David White
  • Signing Director