It might not be tomorrow, but the sunset on the historically high estate tax exemptions is coming – maybe sooner than you expect, so get prepared.

Owning a manufacturing company comes with daily challenges and in the current economy – mounting financial pressures. As many cheaper and lower-paying manufacturing jobs continue to relocate overseas, New York has seen a corresponding rise in technical manufacturing, including computer products, mobile devices, video games, 3-D printing, and general software engineering tools. Despite the rising global competition, it’s impressive to consider that manufacturing ranks as the fifth leading industry in the state, contributing $61 billion to New York’s GDP in 2020. When you’re preoccupied with the next big project on your growing to-do list (while juggling material shortages amidst the ongoing pandemic), it’s easy to forget about long-term financial planning. It’s especially easy to delay making decisions about estate tax, as it’s likely not on the top of your radar. But the reality is that while the Tax Cuts and Jobs Act raised the gift and estate tax exemption to an unprecedented $11.18 million per person in 2018, (more than doubling the limit under the old tax law) the current administration aims to significantly reduce the exemption ahead of its scheduled expiration in 2025. Exactly when the reduction will go into effect is up for debate, but most financial experts agree the change will be here sooner rather than later.

The current Federal rule states that any one person can transfer up to $11.7 million, either in the form of gifts or through inheritance — without having that amount be subject to the current 40 percent Federal gift and estate tax. On September 13, 2021, the House Ways and Means Committee released a proposal for tax changes that would drop the federal estate tax exemption amount to $5 million as of January 1, 2022 – but change could come even sooner. The exemption amount would be approximately $6,020,000 starting in 2022. Read the full legislative proposal, here.  New York State also has an estate tax with a current exemption of $5,930,000, however NYS does not have a gift tax. For NYS estate tax purposes gifts made within three years of death are included in an individual’s estate, while gifts made more than three years before death are not.

I have built my career assisting many clients with the transition of family wealth from one generation to the next in an orderly way with the least tax impact. I also advise my clients concerning the liquidity for estate tax payments. My goal? To minimize the administrative burdens for all the survivors and to help in transferring family businesses in an orderly way during an often stressful time. Some have cited concerns about the amount they are able to transfer and wonder if it’s worth it to act now. Gifts of any amount up to $11,700,000 made outright or through trusts before the date of the proposed bill’s enactment can still reap great rewards. For example:

• While outright gifts to individuals remove assets from your estate, you are also relieved from the income tax responsibility associated with the gifted assets. Gifts to certain trusts allow you to leverage your gift by remaining liable for the income taxes on the assets gifted to a grantor trust – so you continue to whittle down your taxable estate by paying the income taxes on the trust’s earnings even though you don’t receive the trust earnings.
• Grantor retained annuity trusts (GRATs) may still be used to sell assets tax-free to a trust but under proposed tax changes, the window may be closing on this technique. With a GRAT, at the end of the trust term, the remaining appreciation is passed out to a beneficiary without using any portion of your lifetime exemption.
• Between the potential decrease in the gift and estate tax exemption and proposed legislation targeted toward eliminating grantor trusts, now is a critical time to consider life insurance and irrevocable life insurance trusts (ILITS) as part of your estate plan. While gifts that are made to an ILIT to fund the payment of life insurance premiums may be applied toward your gift and estate tax exemption, when the policy is paid out at death the life insurance proceeds may be fully excluded from your estate.

So, what kind of savings are we talking about?

Below we will use an example derived from digital legal analysis site Lexology to illustrate how much money you and your family can save if you plan accordingly and act now.

Let’s assume that in the year of your death, the estate tax rate is 50%. If you were successful this month in shielding an extra $5,700,000 (even if those assets never appreciate over the rest of your life), you and your family avoid almost $3,000,000 in estate taxes (and likely much more considering the appreciating values of such assets and accumulated related income). The takeaway? If you can afford to make gifts to a trust that benefits you and your family, this may be the best time to commit.

While the bill is not yet law, and still needs to be approved by Congress and the President, it’s best to act now so you will be prepared for any future changes. Questions or concerns about the future of your financial planning? Don’t hesitate to reach out to our dedicated RBT team that specializes in working with manufacturing clients, or you can reach out directly to me at irahilly@rbtcpas.com or by phone, 845.205.7986 ext. 263.

Sources: Ways and Means, Forbes, NBC, Lexology, Investopedia