For estate planning, the time to consider wealth transfer is now

When it comes to estate planning, there may be no time like the present. The opportunity to make significant and tax-efficient wealth transfer gifts is set to expire at the end of 2025.

A result of the 2017 Tax Cuts and Jobs Act, the gift and estate tax exclusion as well as the generation-skipping transfer tax exclusion effectively doubled from their 2017 levels – allowing individuals to make generational wealth transfers at a reduced transfer tax cost. Indexed for inflation, the current exclusions allow gifts of more than $12 million before triggering gift, estate, and transfer taxes. Those exclusion levels expire at year-end 2025, when the exclusion level for those taxes will drop to just more than $6 million.

“It’s important to seriously consider the appropriate timeline for passing down wealth,” said Debra Schmidt, Senior Wealth Strategist for PNC Private Bank. “Without any plan, life can come at you quickly. Things may wind up with unexpected results.”

Part of the immediate estate planning process should be considering whether now is the time to make significant wealth transfer gifts before the exclusion rate drops in 2026. Making wealth transfer gifts before death comes with both tangible and educational benefits for recipients. Gifting now provides individuals with an opportunity to pass along financial wisdom and experience to a recipient and allows a beneficiary to access the financial gift sooner.

“We recommend estate tax planning for all our families as soon as there is a transition in play,” Schmidt said. “You can’t just go without some kind of a designation about your current state of affairs. It’s really important to protect the next generation and help them see through your vision.”

Despite the encouragement to act quickly, Schmidt recommends that each family consider their overall financial picture before making any decisions around gifting family wealth. Individuals should consider whether the loss of control of an asset or its potential future income would outweigh the advantage of the current estate tax benefits.

Will gifting a large amount of assets significantly inhibit the donor’s ability to support their lifestyle? Is the recipient ready to manage such a large financial gift? These are among the questions individuals should consider when determining whether to gift wealth, and how and when to do so.

“Everyone’s situation is different, and some are more prepared than others to give or receive substantial financial gifts,” Schmidt said. “Working with a financial planner to help determine the best course of action is a critical part of the process.”

PNC advocates for three potential strategies when considering making a gift of generational wealth.

1. Reduce – For individuals who can afford to do so, gifting the exclusion amount during their lifetime can provide significant benefits to the family, including possible transfer tax savings. 
2. Freeze – Consider moving growth out of the estate by taking advantage of techniques such as Grantor Retained Annuity Trusts (GRAT) or family loans. Freezing techniques may be most effective for those already at or near the exclusionary gift limit.
3. Replace – Life insurance can be an effective means of replacing wealth lost to taxes with applications for estates of all sizes.

The current tax environment may mean now is the time to revisit an estate plan to determine if gifting substantial wealth is the right decision for both donors and recipients.

“Time is moving quickly. It’s time to get your thoughts and planning in order,” Schmidt said. “All of us should have a plan. If we don’t, our heirs are likely to feel the burden of the unexpected.”

 © 2022 PNC Bank, National Association. Member FDIC.