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Giving Wealth Away

Originally published in The Oklahoman on Sunday, October 18, 2020.


Over the next two to three decades, the U.S. will see the largest generational wealth transfer in history from the boomer generation.

Consequently, a large concern for many families is potential changes to the death tax, especially in an election year. Every day during estate planning meetings, clients express concern that when they die, the government is going to “take all of their money.” However, in reality, very few Americans will ever pay the death tax.

Currently, the federal estate tax exemption is set at $11.58 million per person before paying a 40% estate tax on assets over that amount. So, whether in life or in death, a married couple can give away $23.16 million before the federal government assesses a death tax.

Of course, 99% of the people you pass on the sidewalk are not going to have that level of wealth accrued at their deaths. In fact, it’s estimated that only 1,900 families will pay the estate tax in 2020. That’s not for Oklahoma — that’s 1,900 in the entire United States.

It should also be mentioned that unlike some states, Oklahoma does not collect a separate state-level estate tax. In the midst of turbulence caused by a capricious economy, unemployment, and viruses, this may be an opportune time to consider making financial gifts to your loved ones or transferring family businesses or farms to the next generation.

Should you be worried about the estate tax today? Maybe. Don’t count on the federal exemption level to stay static. Since 2000, it’s changed or been adjusted thirteen times. In 2010, the exemption level even temporarily changed to $0.00. In 2026, the exemption amount is set to “sunset” back to $5.49 million, which was the exemption amount before President Trump’s Tax Cuts and Jobs Act in 2017 (TCJA).

Depending on who is elected, today’s tax exemption may not even extend through 2021. If Joe Biden wins the 2020 election and Democrats take control of the Senate, the exemption amount will most likely drop significantly — likely back to the $5.49 million amount before the TCJA or lower.

Further, it’s possible that any new estate tax legislation could apply retroactively to the beginning of the year in which it is passed. As a result, many families may wish to take advantage of the current exemption amount before Dec. 31. $5.49 million sounds like a large amount until you realize that this includes the value of family owned businesses, farmland, minerals, life insurance death benefits controlled by the decedent, homes, retirement accounts, all of which are values determined by the IRS.

If you’re willing to give money away during your lifetime and your estate is worth more than $5.49 million, you may be able to lower your estate tax bill significantly by giving away part of your estate before the end of 2020. By doing so, you will lock in the current exemption amount for your estate, regardless of whether the exemption is lowered in the future. Moreover, any future appreciation of that gift will be estate tax-free to your beneficiaries.

Individuals who are somewhat late in life and do not need all of their wealth to live on should genuinely consider taking advantage of the current estate tax legislation, potentially saving millions in taxes. However, the window of opportunity to make the gifts discussed above could potentially close soon.

As the adage goes, nothing is certain but death and taxes. From global pandemics to the President having COVID, 2020 is the year to expect the unexpected.

Unfortunately, waiting until after the Nov. 3 election may be too late to act. Setting up irrevocable or gifting trusts to transfer wealth out of your estate takes time and coordination between your legal and accounting team, all of whom may get busier the closer we get to the election. Moreover, many times those assets have to be valued or appraised for gift tax return purposes.