July 2023
As of the date of this newsletter, an individual can exempt $12.92 million in assets ($10 million indexed for inflation) from federal estate and gift taxes per the Tax Cuts and Jobs Act. However, after 2025, the exemption under that Act expires and the exemption reverts to its prior level of $5 million (indexed for inflation) per the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.
To add a little historical perspective, the Economic Growth and Tax Relief Reconciliation Act of 2001 provided for the estate tax exemption to gradually grow from $675,000 in 2001 to $3.5 million in 2009. It also reduced the highest estate tax rate from 55% to 45% and eliminated the unified gift and estate taxes, creating a lifetime gift exemption of $1 million. The act repealed the estate tax for 2010, but it was reinstated for 2011. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 raised the exemption to $5 million indexed for inflation, the highest tax rate was lowered further to 35% and the gift and estate taxes were reunited. The American Taxpayer Relief Act of 2012 then increased the highest estate tax rate from 35% to 45%. Then, the aforementioned Tax Cuts and Jobs Act increased the exemption to $10 million, indexed for inflation, where it is today.
Of course, there is plenty of time before the end of 2025 for the tax laws to change, but with the deep divisions between the parties it would be easy to predict that no substantial tax law changes will be passed by then. And since no new laws need to be passed for the exemption reversion to occur, the odds are in favor of the reversion.
With the odds in favor of a reversion of the exemption to the $5 million level, the obvious course for a taxpayer, with the ability to utilize the higher current exemption, is to take advantage of the higher current exemption by seeking out an experienced tax planning professional and do some estate and gift tax planning. And with no idea if or when new tax legislation will be enacted, it’s better to act now than wait until it’s too late. In addition, on November 26, 2019, the IRS clarified that “individuals taking advantage of the increased gift tax exclusion amount in effect from 2018 to 2025 will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels.”
Relevant Court Cases
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Centerpoint Energy Houston Electric, LLC v. Howard
E. Coleman and Coleman Upholstery, Inc.,
No. 14-20-00250-CV,
Texas Fourteenth Court of Appeals,
filed July 6, 2023
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Huntington Way Associates, LLC v. RRI
Associates LLC et al,
Court of Chancery of the State of Delaware,
C.A. No. 2022-0761-LWW,
decided June 30, 2023
Recent Business Valuation Articles
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“A Note on the Valuation of
the Corporate Debt Tax Shield,”
by Dr. Marco Realdon,
dated June 6, 2023
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“Controlling Non-controlling
Shareholders: The Case of Effective Control,”
by Moran Ofir,
posted June 29, 2023
Recent Engagements
- Valuation of 100% of the common stock of a
niche pet service firm on a controlling interest
basis for potential sale purposes.
- Valuation of a 20% limited partnership
interest of a mostly real estate holding company
on a minority interest basis for estate tax
reporting purposes.
- Valuation of the common stock of a general contracting
company on a closely-held minority interest basis,
a freely-traded minority interest basis and a
controlling interest basis, for compensation and
planning purposes.
- Valuation of member interests in a niche contracting
firm on a minority interest basis for
issuance/income tax reporting purposes.
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