Tuesday, May 5, 2020
Wealthy families generally take advantage of down markets during recessions when the tax advantages can be at their highest. 2020 has the unique benefit of having an extremely high federal lifetime estate tax exemption of $11,580,000 for an individual. The law is to sunset in 2025, unless it is extended, so in 2026 it may as well revert to pre-TDCJ amounts. The IRS has clarified that if you gift now, while the exemption is high, it will not count against you when the exemption decreases later.
You can generally make two types of gifts to take advantage of the transfer of wealth in a down market: making gifts equal to the gift tax exemption amount of $15,000 per recipient, making lifetime gifts that utilize all or a portion of your lifetime estate tax exemption amount. In doing such gifting, the property as well as any appreciation of the asset will no longer be considered in your taxable estate.
A word of caution, however: a person who receives the gift will receive your cost basis in it - carryover basis. So if you had purchased the asset low and it had appreciated before you gifted it, when the recipient sells the asset, the capital gains will be found using your purchase price. Alternatively, if you gift an asset at death that the recipient later sells, the capital gains will be calculated at the price it is valued at the time it was gifted to them. This is why investors usually look for assets that have a high cost basis when making a gift, and a low cost basis when keeping assets in their estate.
See Rebecca MacGregor, Leveraging Gifts in a Down Market, Lexology, May 4, 2020.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.