Californians: Act Now to Take Advantage of a Higher Estate Tax Exemption

High net worth individuals and small business owners have reason to celebrate in 2020, the second year that the Tax Cuts and Jobs Act (TCJA) of 2017 has worked to increase the estate tax exemption.

In sum, the law allows qualifying taxpayers to shield more of their assets from estate taxes upon death as compared to pre-2018 levels. However, the window of opportunity to leverage the tax benefits is relatively small, so individuals and couples should act right away to adjust their estate plans for optimum effect.

In clarifying the law, the Internal Revenue Service pointed out that the increase in the estate tax exemption will be $11.58 million for individuals and $23.16 million for married couples.

Over the coming years, the exemption amount will be raised according to inflation rates. The current version of the law sets an expiration date of 2025 for this threshold amount, at which point it may go back to the pre-2019 estate tax exemption level of $5 million.

Charles D. Stark, a Sonoma County attorney who focuses on wills, trusts, and estate planning, stressed one important tip about the higher estate tax exemption.

“It’s absolutely essential to take advantage of the higher level right now, well in advance of the sunset date in 2025. Planning around fluid gift and estate tax laws means you need to act in the moment, since things could change overnight. Statutes like the TCJA can change with fluctuations in the political climate, budgeting, and market conditions. You might think you have time to create an estate plan that shelters as much of your assets as possible, but beneficial tax laws could be gone tomorrow.”

Mr. Stark also pointed out special considerations for small business owners in the context of the higher estate tax exemption.

“Clients will often tell me that they fear losing control over the business by prioritizing the estate plan. Or, at the other extreme, they maintain such a tight grip over company interests that they overlook succession planning.” He had these tips for individuals in such a position:

  • It is possible to develop an estate plan that leverages business interests while enabling sufficient control. One option is to reorganize so that stakeholders have both voting and non-voting shares.
  • Succession planning is central to any estate plan to ensure the business does not go through probate as one of the deceased owner’s assets. The transition should be seamless to ensure no disruption of the company’s operations.

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