The federal gift and estate tax exemption is currently the highest it has been since the tax was enacted over 100 years ago. President Joe Biden has proposed drastically changing the estate tax in order to raise revenues for his infrastructure plans. The Beringer Group believes that now is the time to start exploring the benefits of planning, before any proposed taxes can be passed by Congress.

Under current law, the federal estate tax exemption amount for 2022 is $11.8 million per individual — but only until January 1, 2026, when the exemption amounts will retroactively be placed back to where they were prior to the tax law changes of 2018.

1. Note that the exemption amount doubles for a married couple

For example, if a husband and wife with assets of $23.6 million both died in 2022, their estate would not be subject to federal estate tax. However, any amount over the exemption would be taxed at a 40% rate.

2. A lower set of exemptions is expected to be enacted in 2022, or shortly thereafter

The Biden administration has proposed an immediate reduction in the estate and GST tax exemptions to $3.5 million per individual or $7 million for a married couple.

3. Act now, or risk losing half of your exemption

High net worth individuals should consider making a strategic gift in 2022 before the law changes.  We believe that the new rules will not be retroactive-- therefore if you were considering gifting, it would be beneficial to make a gift this year before potentially losing half of the current exemption.

4. There are ways to maximize your exemption

Consider transferring minority interests in family-controlled entities and interests. This can be achieved by creating two sets of share classes, where one set of shares (A shares) controls the income and vote while the B shares hold value but are unable to affect major decisions.  Once the different share classes are created, the A shareholder typically feels much more comfortable gifting shares of their business to family or management.

5. When gifting to a minority shareholder, you may be able to discount your stock anywhere from 20% to 35% percent

The reason you are able to do this is because of the lack of marketability and control of the stock. Thus, an asset worth $50 million could be valued at $32.5 million for estate planning purposes, which will go a long way in assisting in the transferring of assets out of the federal estate tax system.  Note that newly proposed tax laws seek to reduce this discount by 50% or even end it altogether - another reason to start planning a forward-looking strategy today.  

An analogy that I have used with my clients is that you would not wait to schedule dinner plans the week of Valentine’s Day if you wanted to get into the best restaurant in town. The same can be said with demand for the best planners, valuation firms and lawyers — and once begun, a new plan can take months to finalize.

Take advantage of favorable estate rules & exemptions today, before changes come.

Brad Williams has 15 years of experience in the investment banking industry. He has structured and executed a wide range of complex transactions, including corporate sales, acquisitions, mergers, inter-family planning options, joint ventures, recapitalizations and leveraged buy-outs. Brad can reached at bwilliams@theberingergroup.com / 717-951-2800 for further comments or questions.