If Biden Wins, Should You Gift?

A lot of people are in a holding pattern these days, and not just because of COVID-19. Clients with significant assets are waiting for the 2020 election results to determine if they should make substantial gifts to take advantage of the current $11 million estate tax exemption.  

Under the current law signed by Trump in 2017, the $11 million exemption (which is adjusted annually for inflation and is currently $11,580,000 this year) will be reduced to $5 million (adjusted for inflation) as of January 1, 2026. If Biden wins, that drop could occur sooner. It could also drop even lower than $5 million depending on what lawmakers decide.  

If Trump wins, there will be more time to plan, but the lower exemption is still scheduled to occur unless Congress acts to extend it. How likely is it for Congress to extend the $11 million exemption given the enormous debt the government has to pay due to coronavirus crisis spending? A lot depends on who controls the Senate and the White House after the election. It’s all a guessing game at this point.  

What should you do? 

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First, do you want to gift? You need to be comfortable with gifting large sums and the loss of control that comes with it. Note that if you have already made large gifts in prior years, the amount you can gift now tax free will be reduced by the amount of previous gifts.  

I have a number of clients with assets in excess of $50 million who have decided not to make gifts. They are single and in their 50’s with adult children who will be well provided for, and they want to maintain control of their assets. 

Second, if you are comfortable with the notion of giving away your assets, then you need to determine how much to give. This is where it becomes tricky. In order to capitalize on this opportunity, you are going to need to use up a good portion of your $11 million exemption, certainly more than $5 million. If you give away $2 or $3 million, you have not used up your exemption amount. A single person should look to gift between $5 million and $11 million. A married couple will need to gift between $11 million and $22 million.  

Other clients with sizeable assets are moving forward with making gifts. For example, one husband and wife in their late 70’s, with $40 million in combined assets, have decided that the husband will gift $11 million to trusts for their children in order to lock in his exemption amount. The wife’s health is not good, so she may die first when the exemption amount is still high. For this couple, they wanted to find a “happy median” with one of them locking in their large exemption amounts. 

How to gift

Most people are not making large outright gifts to their family members. The majority of gifts are being made to trusts that will benefit children or grandchildren. Gifts can also be made in trust to benefit a spouse. For example, if a married couple wants to maintain an income stream from the assets, one spouse can gift assets to a trust for the benefit of the other spouse. For instance, if a husband gifts a trust that benefits his wife, she maintains an income stream unless they divorce, and then upon her death the assets could pass to the couple’s family members.

Estate planners are busy now, and that will only increase if Biden wins the election. After the Trump tax laws took effect, many people put the notion of gifting large sums on the back burner since 2025 seemed like a long way off. In a few short weeks, we will know if 2020 will become the year to gift.

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