In the midst of the holiday season, the IRS handed out a gift to wealthy clients last week by officially announcing that there will be no “clawback” of any unified credit used before 2026 (when the exemption reverts to a $5M exemption (indexed for inflation)).
What is a “clawback?” Although the Tax Cuts and Jobs Act increased the lifetime exemption to $10M per person (indexed for inflation), the higher exemption is temporary – it is currently scheduled to sunset after 2025 and revert a $5M exemption (indexed for inflation). Some clients and practitioners were concerned that for deaths occurring after 2026, any gifts made in years where the exemption was higher would be “clawed back” into the estate.
“Now You Know – Make the Gift!” By announcing that there will be no “clawback,” the IRS has alleviated these concerns and presented clients with a unique opportunity to accomplish significant wealth transfer utilizing higher exemptions. However, because of the sunset provision, this opportunity is limited. Now is the time to talk to your clients about making gifts to take advantage of higher exemptions. With proper planning, there are ways to do so that are not only tax-efficient, but incorporate greater flexibility and control into the plan, such as by gifting to a trust with spousal access language.
Legacy Planning Simplified. With estate tax exemptions so high, in many cases, the conversation has changed from estate tax planning to legacy planning. Oftentimes, clients want to leave a legacy that meets a specific purpose or is designed to motivate certain behaviors among beneficiaries such as funds for a down payment on a home, a business start-up, or to cover the expenses related to a beloved family home. For others, the freedom to spend freely in retirement without having to worry about what will be left for the next generation is the goal. With the exemptions so high and new confirmation that there will be no clawback of large gifts made, clients can freely gift life insurance premiums into an ILIT to secure and protect the desired inheritance without exposure to income, gift or estate taxes.
Contact TDC Life to learn more about this strategy and other wealth transfer opportunities in light of tax reform.