The current environment for wealth transfer planning is ripe with opportunity. For many, quick action could provide significant benefits. Two noteworthy reasons why now may be one of the best times to consider wealth transfer planning are the current legislative environment and the present state of the broader public markets.
Public Markets & Freeze Techniques
As of May 1, 2023, the S&P 500, the index that consists of the public stock of the 500 largest companies in the U.S., was more than 10% below its January 2022 high. Because of the relatively poor performance of the index and the broader public markets, many financial professionals still consider the markets to be in correction territory, if not a bear market.
Given currently depressed public market prices, ultra-high-net-worth individuals or families might consider a transfer of public securities to heirs by utilizing a freeze technique. In general, a freeze technique is any wealth transfer technique where the value of the assets for gift and estate tax purposes is considered to be “frozen” at the fair market value as of the date of the transfer, and any growth subsequent to the transfer technique may be passed to heirs free of gift and estate tax. Common freeze techniques include a gift or sale to an intentionally defective grantor trust (IDGT) or gifting to a grantor retained annuity trust (GRAT). The benefit of gifting by utilizing a freeze technique is that the value of the asset is “frozen” as of the date of the technique’s implementation. Thus, transferring a security with a depressed value in a bear market before a market rally back to pre-correction market levels could result in a significant amount of wealth transfer free from gift and estate tax.
As an example: Assume a client has a basket of publicly traded stocks with a cost basis of $10 million and a current fair market value of $9 million, 10% less than cost. If the client implements a freeze technique with these assets, they may be able to successfully transfer $1 million out of their estate if the price of the publicly traded stocks were to rebound to its cost basis of $10 million. In addition, due to the current gift and estate tax landscape, there are significant benefits to implementing one of these freeze techniques now.
The TCJA & Freeze Techniques
In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA). A major provision of the TCJA was the increase of the lifetime gift and estate exemption amount from approximately $5,490,000 to $11,180,000. As a result, an individual could give $11,180,000 either during life or at death with no transfer tax consequences, almost double what they could give in the year prior. This amount has since increased to $12,920,000 per individual as the amount has been annually adjusted for inflation. This major change in the wealth transfer planning landscape allows wealthy individuals to take advantage of the increased exemption to preserve wealth for future generations. The TCJA, however, includes a “sunset provision” with an expiration date of December 31, 2025, and on January 1, 2026, the available gift and estate tax exemption will revert to pre-2018 levels. The expected level on that date is approximately half of the current exemption amount if an adjustment for inflation is applied.
Even though the reversion of the gift and estate tax exemption is codified into law, Congress may choose to make changes prior to 2026 should any proposed legislation have the support of both the House and Senate and the president. Over the past year, Congress has been relatively inactive in regard to significant changes in the transfer tax landscape. However, as evidenced by the Build Back Better Act proposed in 2021, significant changes and proposals can happen quickly.
Assume a married couple has a total estate valued at $43 million in 2023 and has determined through careful wealth planning that they would feel comfortable transferring assets during their lifetimes to take advantage of the lifetime gift and estate tax exemption. They could enjoy the advantages of transferring $25,840,000 ($12,920,000 per individual) should they choose to implement an estate freeze technique prior to 2026. If the married couple in the example below wishes to give away the maximum amount, they can gift an estate tax-free prior to 2026 when the TCJA sunsets and effectively create an additional $5.16 million in wealth for their heirs (see table below). In addition to the wealth preservation achieved with implementing freeze techniques while the TCJA is still in effect, any subsequent appreciation in assets utilized in this strategy would be available to heirs gift and estate tax free.
| 2023 | 2026 | |
|---|---|---|
| Estimated Total Estate | $43,000,000 | $43,000,000 |
| Estimated Exemption Today | $25,840,000 | $12,920,000 |
| Estimated Taxable Estate | $17,160,000 | $30,080,000 |
| Estimated Tax Owed | $6,864,000 | $12,032,000 |
| Estate Tax Opportunity Cost | $5,168,000 | |
The opportunities in the wealth transfer landscape are numerous. If you are interested in implementing a freeze technique to take advantage of the current gift and estate tax exemptions, please reach out to a professional with Forvis Mazars Private Client™ or use the Contact Us form below.