Maximize Estate Benefits as Asset Values Fluctuate

James McArthur is on the SCTC Family Office Services team in Tampa

James McArthur

While it is always a good idea to periodically review one’s estate plans, the passage of the Tax Cut and Jobs Act of 2017 (the “Act”) provided increased opportunities for estate planning. Certain provisions in the Act, along with the reduced asset values in today’s Covid-19 environment, may provide incentives for additional lifetime gifting.

The Act contains some of the most sweeping changes to the IRS Code in decades. It doubled the unified lifetime exemption for estate and gift taxes, raising the current amount to $11.58 million per individual, $23.16 million if married. The lifetime exemption is the amount that can be sheltered from federal estate and gift tax. Gifts that exceed theses exemptions are taxed at a flat 40% rate. A critical part of this provision is that it sunsets, or reverts back, to the previous limits of $5.49 million per individual (indexed for inflation) for any gifts made after December 31, 2025.

Timely transfers or gifts of stock before the exemption recedes is a viable strategy to preserve wealth for successive generations. When stock or securities are gifted, the value is based on their current value. Given that current values are relatively low in today’s market, more shares can be transferred tax free to your children. In addition, future appreciation will be protected from exposure to estate taxes.

Stock or interest in closely held entities may qualify for additional discounts for “lack of marketability” and “lack of control” if minority interests are gifted or transferred to children or grandchildren. These discounts can typically create a 25% to 35% reduction from the sale value of a privately held company.

Whether using marketable securities or closely held stock, the primary strategy is to transfer appreciating assets, such as real estate and stocks, before they begin to appreciate. The result is there will never be any gift or estate tax on the appreciated value.

An extension of this strategy is to transfer assets to grandchildren and great grandchildren, eliminating the need for parents to worry about re-gifting wealth as tax laws change in the future. When considering gifting assets to multiple successive generations consult an advisor as the generation skipping transfer tax (GSTT) will apply. Like gift and estate tax exemptions, the current GSTT exemption for 2020 is $11.58 million and expected to revert to a significantly lower amount in 2025. The same strategy applies – transfer appreciating assets before they gain value and the exemptions expire.

How you structure your gifts to beneficiaries is important. Irrevocable trusts are often used to transfer assets out of an estate and to minimize taxes. As the grantor, you may make gifts to the trust instead of directly to the beneficiaries. You can also specify the amount and frequency of distributions.

Family limited liability companies (FLLC) can be used to gift assets to the next generation while parents are still living and want to maintain control of their interests in the FLLC. This vehicle is often used to transfer stock of closely held companies to family members while multiple generations are active in the business.

Regardless of the options chosen to transfer assets, this is an excellent time to start or continue the conversation on estate and business planning with your family and trusted advisors. We are available if you have questions or would like talk through options.

The Sanibel Captiva Trust Company is an independent trust company with $2.5 billion in assets under management that provides family office and wealth management services, including investment management, trust administration and financial counsel to high net worth individuals, families, businesses, foundations and endowments. Founded in 2001 as a state-chartered independent trust company, the firm is focused on wealth management services that are absolute-return oriented and performance driven. Each portfolio is separately managed and customized specifically to the client’s yield and cash-flow requirements. The Naples Trust Company and The Tampa Bay Trust Company are divisions of The Sanibel Captiva Trust Company. Offices in Sanibel-Captiva, Naples, Tampa, Belleair-Clearwater and Tarpon Springs.


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