If you're worth a lot of money, say at least $10 million up to $23 million or more, the Trump administration just gave your family a truly amazing gift. It's in the form of a new proposed regulation meant to give you a giant tax break--one that could be worth millions.
It's all because of a bureaucratic move few people even noticed, and which happened at a very weird time: late on the Tuesday before Thanksgiving, according to The Wall Street Journal, just as millions of Americans were getting ready to travel and celebrate the holiday.
Here are the details. The regulation still has to go through a comment period, a hearing, and finalization process; if all goes smoothly it becomes law by early 2019.
A problem for wealthy families
The regulation is designed to make life much easier for very wealthy families who want to leave multimillion dollar inheritances to their kids, but who also want to avoid estate taxes.
One common way to avoid those taxes is to make big gifts to your children prior to your death. But there are limits on how much you can give without paying taxes, and the Tax Cuts and Jobs Act of 2017, which President Trump signed just before Christmas last year, doubled those limits.
The lifetime caps on tax-free gifts went from $5.6 million to $11.2 million (or $22.4 million for married couples). But, there's a big wrinkle, in that the law treated corporate tax cuts and individual tax cuts differently.
Corporate tax cuts in the law were largely permanent. But most individual tax cuts sunset in 2025, and go back to the old law.
This created a bizarre problem for rich families, because it meant people their estates would be subject to very different tax rules based on the year in which they ultimately die.
Make sure you die on time?
Example: Suppose you're worth $25 million. You and your spouse give $22.4 million to your children this year.
If you both die in 2024, the total $22.4 million gift to your kids winds up being tax-free.
But if you die in, say, 2026, that means you would have outlived the sunset on the individual tax cuts, and your gifts are subject to the earlier lifetime cap, which means they were no longer totally tax free. In that case, the extra $11.2 million could be subject to a 40 percent tax. Not including adjustments, that works out to $4.48 million in taxes.
You can imagine, financial advisors and estate planners had a hard time telling wealthy clients whether they should make big gifts to their children or not.
But fear not, because Treasury Department bureaucrats have now proposed a regulation to take the burden off these wealthy families.
A regulatory loophole
The new proposed regulation, the Journal reports, basically decrees that tax-free gifts made between 2018 and 2025 will be excluded from the estate-tax calculation--even if you die after 2025, and the gift tax limits for future gifts have reverted back to the pre-2017 levels.
"This is good news for people who are considering making large gifts before the end of 2025. People are more likely to move forward," Andrew M. Katzenstein, an estate attorney at Proskauer Rose LLP in Los Angeles told the Journal.
The Journal estimates that only the top .1 percent of estates--about 2,000 estates per year--are large enough to benefit from this tax cut. So this really is about very wealthy individuals passing cash, securities, and real estate to their kids--and mostly not about entrepreneurs who want to pass family businesses on to their children, for example.
As for why the tax cut only lasts until 2025 to begin with? The negotiations over this law took place behind closed doors, so we can't be 100 percent sure. But cynics might note that sunsetting the individual tax cuts reduced the total cost of the law.
Meanwhile, in order to pass the bill in a way that Senate Democrats couldn't stop with a filibuster, Republicans had to keep the total addition to the deficit over 10 years under $1.5 trillion and minimally thereafter.
Anyway, it's the law. And if you want to to take advantage of this strange tax situation, you'll have to hurry and get both a multimillion dollar nest egg and some kids before the end of 2025. Start now, because the clock is ticking.