Business InsightsNewsTaxes
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 tax rate of 40%. While this exemption is set to decrease by half on January 1, 2026, several legislative proposals could impact the laws even sooner.
What Are the Proposals?
President Biden’s campaign and the Treasury’s Green Book proposed:
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Reducing the exemption to $3.5 million
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Increasing the top rate to 45%
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Triggering capital gains tax upon various transfers, including:
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Gifts
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Death
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Transfers to/from trusts
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Contributions to/distributions from partnerships
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Deemed sales of assets held for 90+ years in a trust or partnership
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These proposals—combined with other pending bills—would significantly shift the estate planning landscape. Notably, some propose retroactive tax law changes, which Congress has the power to enact.
What Can You Do Now?
Many high-net-worth individuals made substantial gifts in 2020, anticipating changes. For those who haven’t, the concern is whether future changes may apply retroactively.
Example
A taxpayer makes an $11.7 million gift on August 1, 2021. If the exemption is reduced to $3.5 million and the rate raised to 45% (effective retroactively), the gift would generate $3.69 million in tax. If both spouses made similar gifts, the total tax would be $7.38 million.
Gifting to the Next Generation – Trust or Outright?
Under current rules, a married couple with no prior taxable gifts can give up to $23.4 million tax-free. These gifts often include cash, stocks, or business interests.
Gifting via trust is generally preferred over outright gifts, as trusts can offer:
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Creditor protection
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Divorce protection
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Estate and generation-skipping tax sheltering
Spousal Lifetime Access Trust (SLAT)
A SLAT allows one spouse to create a trust benefiting the other spouse (and potentially children/grandchildren) while retaining indirect access to the assets.
Key features:
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The donor spouse funds an irrevocable trust
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The donee spouse is a discretionary beneficiary
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The trust is taxed to the donor spouse (grantor trust rules)
Important considerations:
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Jointly owned assets can’t fund a SLAT
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Trusts for each spouse must not mirror each other to avoid the reciprocal trust doctrine
Grantor Retained Annuity Trust (GRAT)
A GRAT allows the donor to transfer future appreciation with minimal gift tax. It’s ideal when the return on trust assets is expected to exceed the IRS Section 7520 rate.
Example
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$10 million funded in July 2021
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8% return over 5 years
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IRS rate: 1.2%
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Result: ~$2.5 million passed to heirs tax-free
Bottom Line
With potential changes looming—and possibly retroactively—now is the time to:
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Review your estate plan
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Consult with your tax and legal advisors
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Consider using planning tools like SLATs or GRATs
A well-structured estate plan will help secure your legacy and mitigate tax risk, regardless of what changes lie ahead.