A lower exemption could expose more of your assets to taxes and impact your ability to pay estate taxes. Therefore, you need to start preparing. We want to answer some questions that might help you understand how a lower exemption could affect you and how to move forward.
Questions & Answers
Who has the most at stake?
People with illiquid assets are most at risk. When the exemption halves (or more), tax bills will go up and require more liquidity. If you own a business, family farm, etc., you might need to sell to pay your estate taxes. It’s crucial to ensure you have enough liquidity (cash, liquid securities or life insurance proceeds) to cover the taxes so you can pass assets on to your heirs.
If the exemption doesn’t halve until 2026, do I need to act now?
Yes. Start working with your legal, tax and wealth management advisors to determine if you’ll have sufficient liquidity in 2026. In this regard, your life expectancy and health matter. Also, consider the growth rate of the illiquid asset and the earnings on the liquid funds. Sometimes the illiquid business asset grows at a faster rate than the liquid funds earmarked to pay the estate taxes.
What if I don’t have sufficient liquidity to pay the estate taxes?
If you don’t have enough liquidity, you have several options:
- A planned installment sale of part of the illiquid asset can generate enough cash. This can happen during life or at death, but waiting until death can be risky. Your family may not have enough cash or the ability to borrow funds to make the installment payments.
- Consult with your legal advisor and ask if a sale to an Intentionally Defective Grantor Trust (IDGT) or a Grantor Retained Annuity Trust (GRAT) makes sense. These strategies can seem complicated but are often effective.
- Gifts to family members using the current exemption amount may make sense. Doing so would lock in today’s $11.58 million exemption per person (the exemption can be used either at death or during life) before it halves in 2026. Additionally, the growth of the gifted asset is in the estate of the next generation and escapes taxation at the death of the senior generation.
- Life insurance (Single Life or Survivorship) can potentially help provide the needed cash at death. Life insurance delivers the exact amount of cash needed at precisely the right time. When structured right, the proceeds are free of both income and estate taxes. If you already have life insurance, ensure it is correctly owned and projected to last until death. If the policy holder also owns the policy, the government will try to add the death benefit proceeds to the total estate value, thereby increasing the estate tax. Review existing policies now so that you can replace coverage, if needed. If you wait until 2026, your health could change and you may not be able to purchase your desired death benefit.
Protecting family assets for multiple generations is possible, but it requires advanced planning. As we approach 2026, review your estate plans and related modeling annually. Depending on political outcomes, you may need to accelerate your financial planning strategies to lock in today’s higher exemption from estate taxes. We suggest meeting with your advisors while the estate and gift tax exemption is relatively high. If you have questions or concerns regarding this or any other financial planning topics, our wealth management professionals are eager to help.
This article was originally published in the 2020 SilverLink Issue 1. Jeff Sharp is a Principal with SilverStone Group, a HUB International company.
Securities offered through M Holdings Securities, Inc., a Registered Broker/Dealer, Member FINRA/SIPC. Investment advisory services offered through SilverStone Asset Management, a HUB International company, a SEC Registered Investment Advisor. SilverStone Asset Management, SilverStone Group and Hub International are not under common ownership with M Holdings Securities, Inc. This material is not intended to present an opinion on legal or tax matters. Please consult with our attorney or tax advisor, as applicable. 2930630.1