With the lifetime federal gift and estate tax exemption amount increased to $11.18 million per individual under the recently enacted Tax Cuts and Jobs Act, clients have an unprecedented and limited opportunity to engage in significant gifting until such time as the exemption is scheduled to revert back to the pre-reform exemption amount of $5 million (adjusted for inflation) after 2025 (or perhaps earlier). It is critical to note that this increased exemption amount is a "use it or lose it" opportunity, given the sunset provision and the chance that a future administration may sooner take action to change the law.
Clients deciding whether to gift assets to take advantage of the temporary increase in the exemption amount should consider the level of their wealth (including future earnings, income and appreciation), asset protection planning, the need for future access to gifted assets, and the income tax consequences of transfer. Moreover, clients need to be aware of the recent increase in interest rates and the concomitant effect on powerful gifting techniques. Specifically, the April Section 7520 rate for use with estate planning techniques such as grantor retained annuity trusts (GRATs), charitable remainder trusts (CRTs), charitable lead trusts (CLTs) and qualified personal residence trusts (QPRTs) is 3.2%, up from 3.0% in March and 2.8% in February. The April applicable mid-term federal rate (AFR) for use with sales to defective grantor trusts, certain intra-family loans and self-canceling installment notes (SCINs) is 2.72%, up from 2.57% in March and 2.31% in February.
Low Section 7520 rates and AFRs can present significant benefits with respect to gifting. However, these benefits become less rewarding as interest rates continue to increase. Accordingly, time is of the essence for clients considering establishing any of the aforementioned estate planning techniques, the performance of which is closely tied to interest rates.
Please contact Lara M. Sass, Esq. for more information.