Three Months are Left to Utilize Very Generous Tax Exemptions

Written By: Asher Rubinstein

income tax return form
The current exemption from federal gift and estate tax is at an all-time high ($11.7 million per person), but if Congress passes the current proposed law, the exemption will only be $6 million beginning on January 1, 2022.  Thus, you have three months to remove $11.7 million worth of assets from your taxable estate ($23.4 million for a married couple), before the opportunity reduces by almost 50%.  This is a relatively easy way to get more to your heirs, and less to the IRS, using current tax law.
  • This is a “use it or lose opportunity”. The exemptions have never been higher. Once the law changes on January 1, 2022, the exemption will be cut in half.
  • Example: You own a family business worth $10 million. You gift it to your daughter in 2021.  Zero gift tax is due. Instead, you gift it in 2022.  Assuming a $6 million exemption and a gift tax rate of 40%, you would owe $1,600,000 in gift tax: $10 million gift – $6 million exemption = $4 million x 40% tax = $1,600,000 in tax due. Same business, same gift, new year, $1.6 million to the IRS.
  • Better example: The business is owned by an LLC (or family limited partnership) that you own. Instead of gifting the business outright (and giving up control of the business), you gift membership interests to your daughter, but you retain your Managing Member interest. The gift of non-managing membership interests now qualifies for a discount of 35%, allowing more estate tax savings, because you can gift up to $18 million of LLC value ($18 million minus the 35% discount equals the $11.7 million exemption, or a whopping $36 million for a married couple). You’ve kept the asset in your family, avoided estate tax, and retained control over the asset.
  • Politicians looking for revenue have also called for repealing the discounts on closely held entities like LLCs and FLPs, especially for those holding non-business assets including portfolios of securities, so the 35% discount may disappear if you do not take advantage of it now. In fact, this change could be effective on the date of enactment, which could be earlier than January 1, 2022.
  • If you’ve already gifted assets up to $5 million (which was the prior exemption), you can now gift almost $7 million more, tax-free.
  • Consider making such gifts in trust, which could provide tax benefits, family governance and asset protection from creditors.
  • We have additional strategies to get assets to the next generation with fewer taxes: Grantor Retained Annuity Trusts (GRATs), Qualified Personal Residence Trusts (QPRTs), Charitable Remainder Trusts (CRUTs), Dynasty Trusts, Irrevocable Life Insurance Trusts (ILITs), and others. These trusts can be used for estate tax minimization, capital gains tax minimization, family management and asset protection. Please see our article, here.
  • However, Congress is also considering changing the law regarding “Grantor Trusts,” which might eliminate these strategies. Like the other deadlines discussed above, the time to utilize such trusts is now, while the law allows it. This change could also be effective on the date of enactment, which could be earlier than January 1, 2022.
  • The above strategies can be used by people of various income levels, not only those with assets in excess of $6 million.
When the tax law last changed, in 2017, Congress set a 2025 expiration date for the favorable changes. To raise revenue, however, Congress is now considering the end of 2021 (or an earlier date of enactment) as the cut-off date to use these tax strategies. Until then, the strategies are legal, very effective, and appropriate, responsible legacy planning.

Please contact us for more information.
about the authors

Asher Rubinstein


Asher Rubinstein's practice focuses on domestic and international asset protection, wealth preservation, estate planning, tax planning, tax controversy, offshore tax compliance, and related litigation. Mr. Rubinstein is a recognized expert on offshore entities, foreign banking, and IRS compliance issues. Mr. Rubinstein also represents and advises wine, spirits, food, and restaurant clients.

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