Give Now to Potentially Avoid Higher Taxes

J Wade Lopez

J. Wade Lopez, CFP®, MSFS Abingdon, Virginia. July 1st, 2021

Gift and estate taxes are going up, and likely at the end of this year.

The Biden Administration has promised to lower the unified tax credit, potentially as low as $3.5 million per person, from the current $11.7 million per person. That could have a huge impact not just on wealthy families, but also on small business owners planning to sell or transfer ownership of their business.

As a reminder, the unified tax credit system puts a lifetime cap on tax-free gifts, whether made during your lifetime or at death. That’s why it’s called a “unified” system: you get one lump sum credit to apply when and where you see fit — applied against gifts of assets while you’re alive, and/or against assets passed through your estate when you die.

Lowering that unified credit to a ballpark of $3.5 million per person, would mean a loss of about $8 million in tax credits per person — a potential loss of $16 million for married couples. That’s a big number! It’s the reason we have been encouraging clients all year to review their gifting strategies and do it with some urgency. If you are planning to give away assets, then consider doing it now when you can still get the full tax benefit.

There are a lot of reasons why gifting now may make sense for many families and business owners, especially those with a lot of illiquid assets — things like residential or commercial real estate; mineral or timber rights; or an asset-heavy or inventory-heavy business (think: paving or metal fabricating or farm equipment sales or a small family-owned race team).

For families that have a high net worth on paper, but a lot of wealth tied up in illiquid assets, the lower tax credit of $3.5 million per person would likely be used up very quickly, with heirs potentially being pressured into an asset sale to pay a hefty tax bill. If you are planning to gift the assets anyway, speeding up the timeline may make a lot of sense.

Another reason to consider gifting now, as opposed to later, is that heirs and/or gift recipients currently benefit from the stepped-up basis on the assets they receive. (Think: an investor who bought FAANG-type stocks twenty years ago, has seen huge gains over the past two decades, and still holds these assets.) Today, heirs and recipients receive the gifted asset at its current basis, and pay no taxes on the gains, as long as the asset value is below the unified credit limit. In the future, however, the IRS may cap the transfer of stepped-up basis. Gains above a certain level may be taxable regardless of whether the grantor has sufficient unified credits to cover the transfer of the gift.

Finally, those with charitable intentions may also want to consider how a change in the unified tax credit may affect their gifting strategies. For example, rather than making a charitable cash gift, wealthy retirees may want to consider gifting IRA assets instead. Why? Because if those IRA assets were passed to their children, the kids would have to pay taxes on those monies — a charity would not.

To be sure, gifting now rather than later is an important strategic decision that could save you significantly on gift and estate taxes. But then there is the question of: how do you do it? What’s the plan?

If you’re giving shares of a business, for example, how do you do it without diluting control before you’re ready to hand over the reins? Consider that different types of stock can be used to transfer value without transferring control.

Then, how do you structure a deal that maximizes the long-term value to you? Consider a paving company that may own a lot of heavy equipment, as well as large a warehousing facility to store it all. You might consider transferring the depreciated assets of the business — without the real estate — at a lower price; then putting more of the business value into a long-term lease agreement for rental of the storage facilities. Such a strategy annuitizes the income from the business over a longer timeframe and retains any appreciation of the real estate asset to be sold later.

What if you’re concerned about spendthrift children? You could benefit from today’s higher unified credit by gifting assets now, but putting those assets into an irrevocable trust out of reach of the children until some later date.

The long and the short of it is this: a carefully formulated plan will work. But you need to have a plan. Don’t wait until you’re faced with a tense, high-pressure situation. Those are the hardest times to make cool-headed, informed choices. For anyone with a net worth of $5 million or more, who is planning on gifting or transferring assets, now is the time to think about accelerating the timetable.

There is a deadline looming. The unified credit will change, and it will change very soon. So, the best advice we can offer you is this: let’s talk about it and make a plan before the end of the year.

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Read More By J. Wade Lopez, CFP®, MSFS

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. Investment advisory services are offered through Concord Wealth Partners, an SEC Registered Investment Advisor.

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