Under a 2016 federal law, the per person gift and estate tax exemption amount was set at $11.58 million. As of 2021, a single person is now permitted to give gifts of up to $11.7 million during their lifetime without incurring any tax liability. Upon their death, the total amount of gifts they have made during their lifetime will be subtracted from $11.7 million to determine how much of their assets in their estate will be exempted from estate taxes.
For a married couple, the maximum gift exemption is doubled to $23.4M. Between them, the spouses are legally allowed to make tax free gifts to family and other individuals of up to $23.4 million ($11.7 million per spouse), less any previous gifts where the gift tax exemption was used. The same exemption applies to estate tax at death, with $23.4 million as the tax-exempt limit, less any prior gifts during their lifetimes.
The gift and estate exemption law extends until 1/1/2026, at which time, the per person exemptions are scheduled to decrease to $5 million, indexed for inflation. However, there are a number of Bills proposed and being debated in Congress aimed at reducing the available gift and estate tax exemptions beginning as early as January 1, 2022.
Whether the lifetime exemption is lowered now or later, high net worth individuals (HNWI) need to prepare for the tax implications with regard to their estate plan.
Trust in Your Trust
Estate planning is a dynamic process, and should be revisited annually, particularly at times where there’s been a political shift in Washington. Gifting money during your lifetime is an effective way to protect your assets from taxes. Because we know that the $10 million (adjusted for inflation) gift tax exemption will be reduced in four years or likely sooner, consider adjusting your estate plan in preparation for this eventuality.
Another way to preserve your estate is through trusts. Living trusts allow you to designate a trustee and beneficiary, but also control the assets as you wish, including use of the money in the trust. Upon your death, they allow your beneficiaries to avoid probate and federal estate taxes within the limits. You may also designate details such as how and when your heirs may access the money.
A major drawback is that the living trust does not shelter your beneficiaries from creditors. If this is an issue, consider a plan we have developed called the HYCET Trust: an alternative living trust for HNWI’s.
Talk to The Creator of The HYCET Trust
We named the trust the “Have Your Cake and Eat it Too Trust” (HYCET) because it provides protection that is not available through the living trust and allows for much more flexibility. It is established in a qualifying jurisdiction that does not allow future creditors to reach the assets gifted to the trust.
In addition, the HYECT trust provides the ability to recapture gifted assets, should you choose to reclaim them. It’s a HNWI trust worth investigating in light of potential changes to federal laws governing gifting money.