Estate Taxes Going Up – Is There Still a Golden Gifting Opportunity?

Janet Yellen, the former Federal Reserve chairperson is now the new US Secretary of  the Treasury.  She has staunchly defended President Biden’s plan to reduce the estate-tax exemption amount from the current US$11.5 million to US$3.5 million, as well as to increase the top estate tax rate from 40% to 45%.  In responding to criticism of President Biden’s plan to reduce the threshold for the federal estate tax, she said “about the wealthiest six out of every thousand estates would face any tax” under the new plan. Hmmmmmm…..

Last year, I warned rich Americans (or foreigners with US assets), to wake up and smell the coffee!  I raised the alarm that inevitable tax law changes were on the immediate horizon and that the estate tax rules were an easy target and would be the first to be hit.  I advised that the opportunity for tax-free gifting was at an all time high given the impact of COVID-19 on asset valuations and the very generous exemption amounts put into place by President Trump with the “Tax Cuts and Jobs Act “(TCJA).  Per final Treasury Regulations issued by the Internal Revenue Service, gifts made under the generous exemption amounts would not be “clawed back” if the exemption amounts were later lowered.  It could not get any better!

For those needing more basic information, you can learn more about the US gift tax (a “transfer” tax imposed on the giver of the gift) and the various exemptions that prevent gift tax at my US Tax Primer here. Full details on the US gift tax issues for foreign individuals and the special concept of “domicile” that applies to them are available at my earlier blog post.

Might Opportunity Still be Knocking? 

The magic cut off date for implementing a guaranteed smart gifting tax plan was December 31, 2020 — that was the date we knew with certainty that the US tax laws would remain unchanged. After that, anything can happen…and change is clearly on the way.

It may still be possible, however, to make gifts under the more generous tax rules that are currently still in effect.  This will depend on the “effective date” of any new tax legislation.  The question has often been asked whether Congress can enact retroactive tax legislation, in effect “setting back the clock” and making a law effective as if it had been enacted at an earlier point in time. Case law has shown that there is no absolute constitutional prohibition to enforcing retroactive tax laws and precedent shows that retroactive tax legislation does indeed happen.  I have blogged on this topic in the past (here and here).

Nonetheless, the ultimate tax law changes that will be made by Congress and the dates they will become effective will certainly be influenced by other factors – e.g., political concerns, COVID-19, the state of the economy, the response of foreign countries to tax landscapes in light of the pandemic and so on. Even though it might be possible for legislation to be enacted retroactively increasing gift/estate tax rates and lowering the exemption amounts (e.g., to the beginning of the calendar year of the year of enactment), it is not certain that the Democratic controlled Congress and the administration under President Biden will ultimately choose this route.  In other words, maybe it is not too late to take full advantage of the current generous gifting rules!

My Advice:  Act quickly.  Use it or lose it.

Gifts can be made in a variety of ways – outright, or through a trust or foundation, using foreign or domestic structures. If not structured properly, the use of foreign vehicles can result in very harsh tax consequences.  With the proper planning, however, very beneficial tax results can be achieved.  Specialist advice is necessary to navigate the US tax maze.  For Muslims, gifts can take into account any Sharia law concerns as well with guidance from a Sharia scholar and US international tax advisor.

I have the experience you need.  Contact me.

Posted January 28, 2021

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