Changes to tax law can impact one's current and future tax obligations and financial planning strategies. As a result, it is wise to have a basic understanding of the impact of tax reform.
One particular area of interest for high net worth individuals involves changes to the gift, estate and generation-skipping transfer (GST) tax. President Donald Trump's new tax law increases this tax exemption for United States citizens and residents to $11.18 million. This is almost double the previous rate of $5.49 million for 2017.
Is it wise to take advantage of this new exemption? The new exemption amount can help high asset estates reduce their overall tax obligations. However, it is important to note that the exemption increase is not permanent. Unless additional legislation passes the exemption is scheduled to sunset to the prior rate adjusted for inflation on December 31, 2025.
How can high net worth estates take advantage of the exemption if it is going to expire?
It is still possible to take advantage of this higher rate even if the exemption disappears after 2025. Making the most of this exemption can help an estate owner decrease the value of the estate, lowering the estate's tax obligations.
Those who are interested in taking advantage of this increased exclusion amount but hesitant due to concerns that the assets may be needed in the future could consider estate planning tools to help meet both goals, such as a Spousal Lifetime Access Trust (SLAT). This legal tool allows the creator to place assets within the trust to benefit the creator's spouse, essentially allowing for benefits from the assets while still taking advantage of the exclusion.
This is just one example of a legal tool that could help an estate owner take advantage of the exclusion amount while still retaining some level of benefit from the assets. An attorney experienced in high-asset estates can help determine the best option for your estate. This legal professional can discuss the various tools that are available as well as potential risks. With this specific example there is concern that those who take advantage of this exemption could experience a "clawback risk" if the giftor dies after 2025. Congress has mandated the United States Department of Treasury to issue guidance on this matter to eliminate the clawback risk. An attorney can guide you through the implications of this option.