Maximize Your Wealth Transfer Opportunities Before 2026
Unlock Your Wealth’s Potential
The current tax landscape offers a unique opportunity to transfer wealth across generations with optimal tax efficiency. However, the beneficial provisions of the Tax Cuts and Jobs Act (TCJA) will expire at the end of 2025, which may significantly impact estate planning strategies. While it is unclear what the incoming administration will do regarding extending the TCJA provisions, high-net-worth families and individuals should consider the available strategies to mitigate future tax liabilities and preserve wealth for future generations.
Overview of Tax Landscape and Wealth Transfer Opportunities
For affluent families, estate taxes can pose a significant financial burden, as estates valued above the federal exemption threshold are subject to a 40% tax rate. The IRS offers annual tax-free gift exclusions, which allow individuals to transfer wealth without incurring gift taxes. In 2024, this exclusion is $18,000 per recipient. Furthermore, each taxpayer has a lifetime exemption adjusted annually for inflation. Currently, the lifetime exemption is $13.61 million per person—more than double the exemption before the TCJA. However, with the TCJA’s sunset at the end of 2025, the lifetime exemption is expected to be cut in half (approximately $7 million), creating an incentive for individuals to act now.
The Value of Gifting Today vs. Gifting in the Future
Transferring assets under current tax provisions presents a valuable opportunity to shield a significant portion of your estate from taxes. Assets transferred today benefit from being removed from the taxable estate, allowing future appreciation to occur outside the estate and benefiting heirs without further estate tax implications. By acting now, individuals can take advantage of the historically high exemption amounts, reducing the tax burden on wealth transfers.
Delaying wealth transfer until after the exemption decreases in 2025 could result in higher taxes and a more complicated estate planning landscape. As tax laws continue to evolve, early planning can ensure that you retain flexibility while minimizing risks associated with future changes in tax rates and asset valuations.
Valuation Opportunities for Wealth Transfer
Valuation is central to any wealth transfer strategy, as the value assigned to transferred assets directly affects the associated tax liability. By strategically leveraging valuation opportunities, high-net-worth individuals can transfer wealth at discounted values, thus minimizing gift and estate tax exposure. Several key opportunities exist for achieving tax-efficient valuations during wealth transfers:
Appreciating Assets Transferred at Current Values: One of the most effective wealth transfer opportunities is to gift appreciating assets while their values are relatively low, before they experience significant future growth. Assets such as stocks, real estate, or privately held businesses can be transferred now, allowing any future appreciation to occur outside of the donor’s taxable estate. By transferring these assets early, families can reduce estate taxes significantly, as the full future value of the asset won’t be subject to estate tax.
Taking Advantage of Depressed Asset Values: Economic downturns or market fluctuations present a unique opportunity to transfer assets that are temporarily undervalued. Real estate, marketable securities, or closely held businesses may experience temporary declines in value during market contractions. Transferring these assets while their valuations are low can lock in substantial tax savings when the asset rebounds in value after the transfer. This opportunity allows wealth holders to effectively transfer more value to the next generation while incurring lower tax liability.
Minority and Lack of Marketability Discounts: When transferring interests in a closely held business or real estate, families can benefit from applying valuation discounts. A minority discount is available when the ownership interest transferred is less than a controlling share, making it less valuable from a market standpoint. Similarly, a lack of marketability discount applies when an interest is not easily sold or transferred, further reducing its valuation. By transferring assets at discounted values, families can minimize gift taxes and estate taxes while retaining control over key family assets.
Use of Family Limited Partnerships (FLPs): FLPs allow families to transfer wealth while maintaining control over the assets. By consolidating family assets such as real estate or investments into an FLP, families can gift minority interests in the partnership to heirs at discounted valuations. The combined effect of minority and lack of marketability discounts often results in significant tax savings. For example, transferring a 30% interest in an FLP that holds real estate may result in a discounted valuation of the interest, reducing the overall tax impact of the transfer while still transferring substantial value.
Transfer of Income-Producing Assets: Assets that generate significant income, such as rental properties or dividend-paying stocks, present an opportunity for wealth transfer that benefits both the donor and the recipient. Transferring these assets removes the income stream from the donor’s taxable estate while allowing the recipient to benefit from ongoing income. If transferred early, these assets can appreciate in value outside of the estate, further shielding future growth from estate taxes.
Grantor Retained Annuity Trusts (GRATs): A GRAT allows a grantor to transfer appreciating assets to heirs while retaining an annuity payment for a fixed period. The taxable value of the gift is the present value of the remainder interest in the trust, which can be minimized if structured correctly. If the assets appreciate beyond the IRS-set Section 7520 interest rate, the excess value passes to beneficiaries tax-free. GRATs are particularly advantageous when interest rates are low, and assets are expected to appreciate significantly in the future.
Intentionally Defective Grantor Trusts (IDGTs): An IDGT is an irrevocable trust where the grantor pays income taxes on the trust’s earnings, but the assets grow outside of their estate for estate tax purposes. By selling appreciating assets to the trust in exchange for a promissory note, for example, any appreciation above the interest on the note passes to beneficiaries free of estate tax. This strategy is particularly effective in low-interest-rate environments.
The Importance of Timing and Planning
As wealth transfer strategies often involve complex financial and legal considerations, timing is crucial. Acting before the TCJA’s sunset in 2025 allows families to capitalize on current favorable conditions. However, rushing to implement wealth transfer plans without thoroughly considering and modeling valuation opportunities, family goals, and tax law compliance can lead to missed opportunities or unintended tax consequences.
Early planning provides flexibility and allows for strategic execution over time, ensuring that wealth is transferred efficiently and in accordance with the family’s long-term objectives. Working with an experienced team of advisors, including estate planners, financial advisors, and valuation experts, is key to successfully navigating the complexities of wealth transfer and optimizing valuation opportunities.
Customizing Wealth Transfer Strategies
Effective wealth transfer is not a one-size-fits-all approach. Strategies should be tailored to individual circumstances, family goals, and the specific nature of the assets involved. By working with a trusted team of financial advisors, estate planners, and valuation experts, individuals can develop customized plans that align with their desires for wealth preservation, succession planning, and philanthropic endeavors to create a lasting legacy.
As the TCJA’s sunset approaches, high-net-worth individuals should capitalize on the current tax environment to transfer wealth efficiently. By leveraging key valuation opportunities—such as transferring appreciating assets, applying valuation discounts, and utilizing strategic structures such as FLPs and GRATs—individuals can minimize their tax burden and maximize the wealth transferred to future generations. Thoughtful planning and a proactive approach are essential to preserving wealth, mitigating tax liability, and ensuring a smooth generational transfer.
How can we help?
Our team at EHTC is here to guide you through the process. While teaming with your strategic advisors, we can help formulate a customized plan that allows you not just to gift your wealth but gift it with a purpose. We offer expertise in tax planning, modeling, and valuation services to ensure your wealth transfer is executed smoothly and effectively.
Reach out today to explore how you can maximize your wealth transfer strategy before the current 2025 deadline. We can help formulate a customized plan that allows you not just to transfer your wealth, but do so with purpose.
Valuation Services Partner
matt.fegan@ehtc.com
616.551.4161
Tax Services Director
jo.gould@ehtc.com
616.551.4089
