Think an Extension of the Estate and Gift Tax Exemption is a Done Deal? Think Again.

With the new Administration and Congress now firmly in place, in our experience, many people assume that the long-feared “sunset” of the current estate and gift tax exemption amount will not actually take place. It is taken for granted that President Trump and the Republican-led Congress will simply extend or make permanent in its entirety the Tax Cuts and Jobs Act of 2017, which would keep the estate and gift tax exemption amounts at their current levels.

Now for the reality check: Politics is an inherently messy business, and there is no such thing as a “sure thing.”

Three Likely Scenarios

As it stands now, unless Congress acts, the current lifetime estate and gift tax exemption of $13.99 million ($27.98 million for a married couple) will be cut in half, indexed for inflation, starting January 1, 2026.

In the current political environment, that is a long way off. An enormous amount of political gamesmanship will no doubt happen between now and the end of the year. We believe there are three scenarios that could play out:

1) The estate and gift tax exemption amount sunsets as scheduled at the end of this year without any modifications, cutting the exemption amount in half.

2) Congress takes action to extend or make permanent the Tax Cuts and Jobs Act, which keeps the current estate and gift tax exemption amount where it is now.

3) Some sort of hybrid legislation is agreed upon, arguably the most likely outcome, but also the biggest wildcard because we won’t know what that could look like until a bill is formally drafted and debated.

Start Planning Today

With so much uncertainty, many investors may opt to take a wait-and-see approach. At Sequoia, we believe now is the time to begin developing actionable strategies in response to the scenarios presented above. To be clear, this is a time for planning so that you can be ready for whatever may come, not for making decisions. Below are key considerations to explore in collaboration with your advisory team.

First, take a hard look at your total estate.
Carefully examine your estate plan (trusts, wills, powers of attorney, etc.) and consider what you may want to “pull forward” before the end of the year. Doing so could result in a sizeable financial commitment and will require a thoughtful cost-benefit analysis considering each potential scenario listed above.

In conjunction with a full estate plan review, conduct stress testing of your plan assuming each of the potential different tax scenarios. Ideally, this will expose any gaps or weaknesses, allowing time to resolve issues that surface.

Consider proactive gifting and estate planning strategies now.
The following gifting and estate strategies can be advantageous to any of the scenarios detailed above. But the way they are leveraged will be specific to each person’s situation and based on what ultimately happens with the tax policy. The Sequoia team stands ready to advise you on implementing any of the following strategies.

1) Fully leverage annual exclusion gifts.
You can make up to $19,000 ($38,000 for married couples) in direct gifts to your heirs this year without impacting your lifetime estate and gift tax exemption amount. If you have the liquidity and desire to do so, you can maximize tax-free transfers to your beneficiaries now.

2) Use all of your current lifetime gift tax exemption.
Even if you previously used all of your allotted lifetime estate and gift tax exemption amount, that threshold typically rises each year, so you may have additional money to gift and still fall under the exemption limit. Don’t leave that money on the table.

3) Explore charitable giving strategies.
If you are philanthropically inclined, there are several charitable giving strategies to consider. Charitable remainder trusts (CRTs) can be advantageous in this relatively high-interest rate environment, as they place a higher value on the remainder interest that goes to charity. A CRT provides flexibility as well, allowing you to receive income during the duration of the trust or redirect that income to your heirs.

Additionally, you can currently make gifts at a higher percentage of your adjusted gross income (AGI) and deduct from your taxes a larger portion of those gifts in the year that they’re made. At this time, cash donations to public charities can equal up to 60% of your AGI. If the current tax law sunsets, that would drop to 50%. Even if you are not sure at this time which charities you want to benefit from your generosity, a donor-advised fund (DAF) can accept gifts today, allowing you to decide later the specific charities you want to support.

4) Consider various trust strategies.
There are several trust strategies that can be beneficial in helping to use as much of your estate and gift tax exemption as possible.

An intentionally defective grantor trust (IDGT) places assets in a trust outside of your estate, and therefore not subject to estate tax. However, any income the trust produces is taxed to you. That can be a benefit because it allows you to spend down your estate, reducing what might be subject to estate tax in the future. Plus, those tax payments will not be considered a future gift to any beneficiaries.

For married couples, another option that builds upon the benefits of an IDGT is a spousal lifetime access trust (SLAT). A SLAT allows for gifting under the current exemption amount while providing for considerable flexibility with trust assets. For example, your spouse can be named a beneficiary of a SLAT, thereby allowing you to access the assets in the trust through your spouse if needed in the future.

Regardless of whether the current estate and gift tax exemption sunsets as scheduled, is extended, or morphs into some hybrid tax policy, your Sequoia advisory team will continue to monitor this legislation and is well-prepared to explore the financial, legal, and tax implications of each of the scenarios outlined above and how they could impact your financial goals.