The Cost of Waiting to Make a Large Gift: Compounding Your Tax Savings

By Gordon Schaller - Managing Partner, Orange County Office at Jeffer Mangels Butler & Mitchell LLP

14 March 2022

If you are planning to make a large gift as part of your estate plan, you should consider taking advantage of the current tax exemption in effect until the end of 2025. After this time, the exemption will revert back to approximately one-half of its current value. This has potentially huge implications for hospitality executives and other high-net-worth individuals. Gordon Schaller, managing partner of JMBM’s Orange County office, explains below.

The Tax Cut and Jobs Act of 2017 doubled the lifetime gift and estate tax exemption, effective for gifts made from 2018 through the end of 2025. In 2026, the exemption will revert to the 2017 exemption, adjusted for inflation (approximately one-half of the 2025 exemption). There was great concern during the last part of 2020 and most of 2021 about the possible reduction of the lifetime gift and estate tax exemption prior to the scheduled reversion. However, Congress did not enact any change to the exemption, and it seems unlikely to do so for the foreseeable future. The current exemption is $12,060,000 per person, or $24,120,000 per married couple.

What should clients do now? For those who can afford to do so, they should utilize the exemption now. The cost of waiting, or the benefit of acting now, can be illustrated by the following table. The first example demonstrates the effect of a $12 million gift now, compounded at 6% over many years, compared to a $6 million gift when the exemption reverts in 2026, compounded over the remaining years. By 2050, the difference is $37 million in the first example. The second example shows an even greater disparity in outcomes ($57 million) when the assets gifted consist of an interest in a partnership, LLC, corporation or real estate that qualifies for valuation discounts for lack of control and lack of marketability.

The Cost of Waiting to Make a Large Gift: Compounding Your Tax Savings
The Cost of Waiting to Make a Large Gift: Compounding Your Tax Savings

The cost of waiting until the exemption drops is the additional taxes required to transfer an equivalent amount in assets to your beneficiaries at a 40% gift/estate tax rate – $14,818,653 in Example 1, and $22,797,928 in Example 2.

Richard Russell, the late publisher of the Dow Theory Letters, published an article titled, “Rich Man, Poor Man” describing several simple rules for financial success. At the head of the list is: Rule 1: Compounding, in which he writes “Compounding is the royal road to riches.” As Russell notes, it is safe, sure and anybody can do it. The same is true of the timely use of the gift and estate tax exemption for those able to do so. The results are dramatic for those who act soon.

About JMBM’s Taxation, Trusts & Estates Department

Jeffer Mangels Butler & Mitchell LLP has one of the leading taxation, trusts and estates practices in California, within a full service law firm. In addition to serving individuals, families, and closely-held businesses, our clients include organizations ranging from start-ups to Fortune 500 companies. Our trusts and estates practice is recognized with a national first tier ranking by U.S. News & World Report / Best Law Firms®.

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JMBM Global Hospitality Group

1900 Avenue of the Stars, Seventh Floor
Los Angeles, CA 90067
United States
Phone: (310) 203-8080

Gordon Schaller

Gordon Schaller is a prominent tax and estate planning attorney in Southern California who has been in practice for over 30 years. Gordon focuses his practice on tax, estate planning, business succession, charitable and wealth management services and trust and estate litigation. He has represented individuals, family offices, and numerous public and private charitable organizations. He provides creative solutions for tax, charitable, business succession and family issues. Gordon is well known throughout the country for developing comprehensive, integrated multi-generational wealth planning, preservation, insurance and management solutions.

Jim Butler

Phone: +1 310 201 3526