3 reasons high-net-worth families should review estate tax planning now

Over the last few decades, there perhaps has never been a better time than now to transfer wealth to your children, grandchildren and future generations or to trusts for their benefit. A combination of factors may suggest some urgency and an opportunity to complete estate tax planning now.

Depending on the outcome of elections this fall, based on candidate positions, the federal gift and estate tax emption amount could be reduced significantly.

In addition, the economic downturn brought on by the COVID-19 pandemic may have provided you with the short-term benefit of temporarily lower corporate valuations if the profits of your company have declined.

Finally, historically low interest rates deliver an additional boost to certain estate tax planning techniques.

Let’s look at these issues in more detail:

1. Federal estate tax exemption and rates

The federal gift and estate tax exemption has increased significantly over the last couple of decades. The amount of wealth that can be transferred tax free during lifetime or at death per person in 1999 was $650,000. In 2020 it is $11.58 million per person (or $23.16 million for a married couple).

However, under current law, the exemption amount sunsets on December 31, 2025, and decreases in 2026 to the 2017 level of $5 million per person plus inflation since then (it is estimated that it will be between $6 million and $7 million).

The upcoming elections could further affect the exemptions. There is no official position for the Biden campaign on changes to the federal estate tax as of the date of this article other than a statement that he will pay for 12 weeks of family and medical leave by returning the estate tax exemption to 2009 levels of $3.5 million per person (or $7 million for a married couple).1 Currently, transfers above the exemption amount are taxed at a rate of 40% of the fair market value of the transferred asset. The 2009 estate tax rate was 45%.

Example: Under current tax law, a married couple could transfer $23 million to a trust for their children without incurring transfer taxes. By comparison, if the federal exemption is reduced to $3.5 million per person (or $7 million for a married couple), the same transfer could cause an immediate gift tax due of approximately $8 million.

It must be noted that members of Congress do not have unified positions on the estate tax based on their party affiliation. There are Democrats who want to continue with a high exemption and Republicans who think a lower estate tax exemption is good public policy. Predicting the outcome of future estate tax exemptions and rates will be tricky, but it might be best to at least be prepared to act if needed.

2. Lower company valuations

With the economic downturn caused by the pandemic, family-owned business valuations may be temporarily lower. Combined with traditional discounts that can be taken for family-owned companies, such as lack of marketability and lack of control, this may create a temporary opportunity to gift company stock to children or a trust for their benefit while using less exemption. As the economy and company valuations rebound, the rebound of the value, plus all future growth, will occur out of the taxable estate.

Example: Parents want to gift $5,000,000 of non-voting ABC company stock to a trust for the benefit of a child assuming control and ownership of the business. With the economic downturn, the sales of the company have temporarily faltered. The parents can therefore obtain a valuation of the company at less than expected, which means the parents use less of their gift tax exemption with the gift.

In combination with fairly standard discounts for lack of control and lack of marketability, the parents obtain a valuation of only $3.5 million for the shares being gifted. Once the economy rebounds, the future value of the shares will likely be worth at least $5 million in the trust, but the parents only use $3.5 million of their lifetime gift tax exemptions to make the gift.

3. Low interest rates

In response to the economic downturn, the federal reserve has set interest rates at historic lows. Certain common estate tax planning techniques benefit significantly from these lower interest rates. The September 2020 minimum interest rate that must be applied by IRS rules for intra-family transactions (AFR) for short term loans (loans of three years or less) is 0.14% and for long term loans (more than nine years) is 1%.2

Example: Parents desire to sell $5,000,000 of ABC Company stock to a trust for the benefit of a child assuming control and ownership of the business. They sell the stock on a 10-year installment sale to the trust with a 1% interest rate. Compared to using a more commercially acceptable 5% interest rate, the trust saves over $1.1 million of interest that it must otherwise pay the parents. This, in turn, keeps that additional value out of the parents’ estate, reduces their income tax on the interest and allows the trust to fund the purchase more easily.

Low interest rates also benefit other techniques like grantor retained annuity trusts, inter-family loans and charitable lead annuity trusts. Lower interest rates are less favorable for techniques like charitable remainder trusts and qualified personal residence trusts.

Ready to start your estate tax planning?

For anyone considering large gifts, modeling the potential impact of the gifts on their ability to continue living in the lifestyle they desire as part of their overall financial plan is important. It’s best for someone not to rush into doing some larger estate tax planning that they might later regret.

In summary, act carefully when trying to predict the outcome of elections or future legislation. At the same time, families with significant estate exposure should at least be planning to move quickly if it appears the current estate and gift tax exemption could be at risk. For those families in particular that have significant estate tax exposure and were likely to make use of the current gift and estate tax exemption prior to the sunset of the current exemption in 2025, they may be forced to speed up their timeline and make such gifts sooner than anticipated.

If you have any questions about estate tax planning, your unique situation or how to get started reviewing your options, contact us.


3 reasons high-net-worth families should review estate tax planning now

Or continue reading:

4 reasons why right now is the best time to gift your business

Estate planning steps for each stage of your life

Don’t overlook these three critical transition-planning issues

Wipfli Financial Advisors, LLC (“Wipfli Financial”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC); however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Wipfli Financial is a proud affiliate of Wipfli LLP, a national accounting and consulting firm. Information pertaining to Wipfli Financial’s management, operations, services, fees and conflicts of interest is set forth in Wipfli Financial’s current Form ADV Part 2A brochure and Form CRS, copies of which are available from Wipfli Financial upon request at no cost or at www.adviserinfo.sec.gov. Wipfli Financial does not provide tax, accounting or legal services. The views expressed by the author are the author’s alone and do not necessarily represent the views of Wipfli Financial or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Wipfli Financial, and Wipfli Financial does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Wipfli Financial of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional.
Dean Stange

J.D., CFP® | Principal, Senior Financial Advisor

Dean Stange, J.D., CFP®, is a Principal and Senior Financial Advisor with Wipfli Financial Advisors in Madison, WI. As an attorney, Dean has provided estate and succession planning advice to business owners for more than 20 years. He primarily focuses on the ways in which business ownership, tax and estate issues can impact long-term financial planning.

No Comments Yet

Comments are closed

3 reasons high-net-worth families should review estate tax planning now

time to read: 4 min