Preparing for the Estate and Gift Tax Exemption Sunset: Essential Steps

The estate and gift tax exemption sunset is drawing closer day-by-day. Right now, you could make lifetime estate and gift transfers of up to $13.61 million and not pay any taxes. However, from 2026 onwards, this limit could be reduced to $6.99 million, or even $5.49 million if inflation is not considered.

Hence, many business owners and top executives are giving great importance to estate planning. 

In this article, to help you minimize your tax liabilities, we will go over the details of the estate and gift tax sunset, other important gift tax exemptions, strategies to minimize tax liabilities before the estate and gift tax sunset, the importance of gift tax valuation reports, and the impact of this sunset on business interests.

Gift Tax Exemption

For tax purposes, a transfer of money, real estate, or other assets without receiving anything of significant value is termed a gift. In the United States, the headline gift tax rate is 40%. Although there are no federal inheritance taxes, according to PwC, the maximum real estate tax is 40%.

Some gifts on which no taxes have to be paid include:

• Gifting someone money to pay tuition or medical expenses
• Gifts to your spouse
• Gifts to political organizations

Additionally, every taxpayer can claim a lifetime federal estate and gift tax exemption of $13.61 million. If a couple is making a joint gift, the limit is doubled to $27.22 million. This was one of the major impacts of the Tax Cuts and Jobs Act of 2017. Under the provisions of this act, the gift amount is adjusted for inflation, creating an even greater opportunity for tax savings.

However, these provisions will stay in effect only until the end of 2025. There is a possibility that the exemption limit will be extended or modified, but, right now, it is best to make estate planning decisions based on what we know for certain.

Once these provisions are rolled back, the single taxpayer tax limit for lifetime federal gift and real estate tax will drop to $6.99 million. If the limit is not adjusted for inflation, it may even drop to $5.49 million.

If you are in the middle of estate planning and want to make the most out of the existing provisions, consider getting a gift tax valuation from Eqvista.

Best strategies for gifting assets before sunset

The best ways to gift assets before the estate and gift tax exemption sunset are as follows:

Direct transfer

The most obvious choice is to gift assets up to the lifetime exemption limit of $13.61 million before the sunset of the provisions. Not going beyond the lifetime exemption limit before the end of 2025 can be a prudent strategy. If the limit is extended or modified post-2025, you would still be in a position to make the most of any positive future reforms.

Utilizing other gifting limits 

Every taxpayer can gift up to $18,000 to any number of individuals in 2024 without having to report income to the Internal Revenue Service (IRS). This tax exemption limit is doubled to $36,000 for spouses.

If you are a single parent to 2 kids, you could gift $18,000 to both kids every year without owing taxes. If you and your spouse have 2 children, you could gift $36,000 to each kid every year without owing any taxes.

If you’re a single grandparent, you could gift $18,000 every year to any relatives you wish to support without owing any taxes. Once again, this limit is doubled if the gift is given with your spouse.

Choosing the right assets

When you are choosing which assets to gift in your lifetime, you must consider the cost at which you bought them and the expected future gains. The tax liability of lifetime gifts is set based on the current price of assets. So, if high growth is expected from some assets, it makes sense to transfer them while the value is low.

The cost consideration applies to assets that may be sold off by the beneficiaries in the future. When assets received through lifetime gifts are sold, they are taxed on the difference between the acquisition cost for you and the selling price for your beneficiary. So, if you transfer an asset that has already achieved significant growth, your beneficiaries must pay a high tax.

Utilize Eqvista’s gift tax valuation report and make the most of the lifetime federal real estate and gift tax exemption as well as the annual exemption limit. We could also assist you in choosing the right assets to gift.

Lifetime Estate and Gift Tax Exemption Sunset

As a result of the Tax Cuts and Jobs Act of 2017, the lifetime federal estate and gift tax exemption was almost doubled to $13.61 million. Any gifts beyond this limit could be taxed at a rate as high as 40%. This exemption was a major relief for high-net-worth families.

However, the lifetime federal estate and gift tax exemption sunset will arrive by the end of 2025, after which the exemption limit will change back to 2017 levels. From 2017 to 2024, we have experienced absolute retail inflation of 27.39%. If the exemption limit was changed back to 2017 levels after adjusting for inflation, it would change to $6.99 million. If not, the limit would change back to $5.49 million.

To make the most of the existing lifetime federal tax exemption on estates and gifts in a tax-compliant manner, it is extremely important to consult valuation and taxation professionals.

Obtaining a Gift Tax Valuation Report

In the US, taxpayers are subjected to a high headline gift tax rate of 40%. There are various exemptions you can utilize to lower the tax liability, however, these exemptions come with strict rules and regulations. So, you will require the services of a gift and estate tax expert like Eqvista.

We can offer you a gift tax valuation report that will help minimize your tax liabilities. The process of obtaining such a report is as follows:

• Initial interview: Our team of NACVA-certified valuation analysts and accredited taxation experts will sit with you to gather information about your estate and your dependents. At this stage, you can also talk to us about charities and causes you would like to support.
• Request for documents: We will ask for documents about your assets and any related transactions. We will also try to get a record of the gifts you have shared until now.
• Analysis: Over 10-15 business days, we will analyze your documents thoroughly and try to come up with a viable strategy that meets your needs as well as the needs of your dependents.
• Gift tax valuation report: We will compile all our findings and recommendations in a detailed but succinct report. This will contain the strategy for minimizing taxes.

The gift tax valuation report will contain the following components:

• Summary of findings
• Recommended strategies for minimizing taxes
• Expected tax liabilities
• Methodologies used for valuation
• Summary of valuation process complete with all data used as inputs and financial projections made

Contact our team to get a sample gift tax valuation report now!

How Does the Sunset of Estate and Gift Tax Exemption Impact Business Interest?

As we head towards the estate and gift tax exemption sunset, we expect an acceleration of business interest transfers over the next 1 year and 3 months. Business owners will rush to gift shares and other equity interests to family members or place them in trusts.

We also expect an increase in demand for business interest valuations. To transfer as much value as possible before the estate and gift tax exemption sunset, business owners will hope to reduce their tax burdens through lower valuations. Business interest valuation demand will rise especially for sectors currently experiencing a downturn.

We could also see an acceleration in succession planning. We could see a high influx of younger generations in leadership positions in family-owned businesses. Over time, the percentage stake of the younger generation could be increased by paying out stock-based compensation and the sale of shares from the older generation to the younger generation.

Business owners whose family members are young would want to protect them from making hasty financial decisions. At the same time, these business owners, too, may want to act before the estate and gift tax exemption sunset. So, we may see an increased use of trusts for estate planning.

Partner with Eqvista for Expert Estate and Gift Tax Planning

High-net-worth individuals and business owners must act swiftly before the estate and gift tax exemption sunset. Currently, the government has generously kept the lifetime estate and gift tax exemption limit at $13.61 million. However, this window is closing fast and the limit could drop to $6.99 million or even less by 2026.

To maximize the benefits of the existing provisions, consider strategies such as direct transfers, utilizing annual gifting limits, and carefully selecting assets to transfer.

We expect the approaching estate and gift tax exemption sunset to trigger the acceleration of business interest transfers and succession planning.

In such a scenario, it is difficult not to be swept away by herd mentality to make the same mistakes as everyone else. So, consider getting Eqvista’s gift tax valuation report complete with tax minimization strategies and valuations of portfolio assets. Contact our team to know more!