As a result of the Tax Cuts and Jobs Act of 2017, individuals and married couples could transfer large amounts of their wealth without incurring federal estate or gift taxes for several years. The exemptions, still now in effect, are $13.61 million for individuals and $27.22 million for married couples.
A recent article from Reuters, “Avoiding the mad dash to 2026: the use of LLCs for vanishing gift exemptions,” advises high net worth individuals and families to consider using a Limited Liability Company to use the high exemption amounts before they decrease.
By forming and funding an LLC and then gifting the ownership interest in the LLC to subsequent generations, donors receive several benefits. They can centralize management of the underlying assets, use gifting to move assets out of their estate before 2026 and integrate the use of LLC gift interests into a long-term estate planning strategy. This strategy may apply to families who own businesses and real estate property.
The federal exemption amounts need to be used by December 31, 2025. If an individual only uses $5 million of their exemption before the deadline and then the exemption decreases to roughly $7 million, they’ll only have an exemption of $2 million for future lifetime gifts or upon their death. This is a “use it or lose it” opportunity.
The IRS has confirmed it won’t “claw-back” exemptions done before the law sunsets. If a person or a couple uses their exemption in a timely manner, the estate won’t be penalized. Donors who use the full exemption will be grandfathered into the higher exemptions, if the exemptions expire.
If a surviving spouse has remaining Deceased Spousal Unused Exemptions, or DSUE, they must first use all remaining DSUE before using their own exemptions. Let’s say a surviving spouse has $8 million of remaining DSUE and $13.61 of their own gift tax exemption. They would have to make gifts of at least $21.61 to use the entire remaining exemption.
If you are considering using the LLC gift strategy, you should start by forming an LLC and transferring assets into it. The assets may include cash, securities, private investments and real estate that you would otherwise have gifted to the next generation. Once the property has been contributed to the LLC, there will be time to decide how to make the gifts.
It is possible that the legislation could be negotiated towards the end of 2025. However, the LLC will already be in place, and the assets will still be under the donor’s control and ownership.
Given the uncertainty over the future of these federal exemptions, meet with your estate planning attorney now to develop a strategy to maximize wealth transfer. Other tools must also be explored, all of which take time to consider and execute.
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Reference: Reuters (Aug. 26, 2024) “Avoiding the mad dash to 2026: the use of LLCs for vanishing gift exemptions”