Taxes
Currently, U.S. citizens and non-U.S. citizens domiciled in the U.S. are entitled to an $11.7 million gift and estate tax exemption and are subject to a maximum marginal rate of 40%. While this exemption is scheduled to drop by half on January 1, 2026, new tax proposals may accelerate changes even sooner.
What Are the Proposals?
President Biden and the Treasury’s Green Book propose:
Reducing the exemption to $3.5 million
Increasing the tax rate to 45%
Triggering capital gains tax on a broader set of transfers, including:
Gifts
Transfers at death
Transfers to/from trusts and partnerships
Deemed dispositions after 90 years of asset holding in trusts or partnerships
Some proposed legislation could be retroactive, which, while rare, is legally permitted by Congress.
What Can You Do Now?
In 2020, many taxpayers made substantial gifts in anticipation of law changes. For those who haven’t acted, there’s a real risk that a gift considered tax-free today could become taxable if the law changes retroactively.
Example:
A taxpayer makes an $11.7M gift on August 1, 2021. If Congress retroactively lowers the exemption to $3.5M and raises the tax rate to 45%, that gift would generate $3.69M in tax. If both spouses make equal gifts, the total tax would be $7.38M.
Gifts to the Next Generation: Trust or Outright?
A married couple can gift up to $23.4 million tax-free today. Gifts can include cash, securities, or business interests. Gifting via trust (rather than outright) offers:
Creditor and divorce protection
Estate/gift tax sheltering
Multi-generational planning
Spousal Lifetime Access Trust (SLAT)
A SLAT allows one spouse to gift assets to a trust benefiting the other spouse and family. It’s irrevocable, but the donor spouse pays the income tax on trust earnings (grantor trust status).
Important considerations:
Assets must not be jointly owned
Spouses should avoid mirror-image trusts (to prevent “reciprocal trust doctrine” risks)
Must plan for divorce or death of the donee spouse
Grantor Retained Annuity Trust (GRAT)
A GRAT is a tax-efficient way to transfer future appreciation with minimal gift tax impact. For instance:
$10M funded in July 2021
Assumes 8% growth over 5 years
IRS 7520 rate at 1.2%
~$2.5M could pass to heirs tax-free
GRATs are particularly effective when asset appreciation is expected to exceed the IRS hurdle rate.
Final Thoughts
Taxpayers who haven’t recently reviewed their estate plan should consult with legal and tax advisors immediately. With potential retroactive law changes, proactive planning is essential to protect wealth and ensure tax-efficient succession.