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Take Advantage of This Golden Age

Take Advantage of This Golden Age

May 02, 2024

You worked hard all your life and, combined with a bit of luck, have created an amazing living legacy. However, when you pass, a large chunk of that legacy might be given to the government rather than to your heirs or the causes you care about due to what we at ASE Private Wealth™ call the Social Capital Tax™.

Fortunately, we are living in the ideal time to engage in proactive planning that may allow you to convert that living legacy into a lasting legacy, allowing more of your hard earned success to flow to your family and to the charities you champion.  Below, we take a brief historical trip, get the current lay of the land, and then discuss ways that you can help ensure you can successfully leave the legacy you choose.*

A Brief Look Back

An element of legacy is how actions from the past impact the present and the future.  Therefore, before getting to where things stand today and where we are headed, it is informative to take a look back at history.  In this case, we are going to examine the history of the estate tax.

Variations of the estate tax have existed for millennia. The first known instance of such a tax was found in Egypt in 700 B.C. where a 10% levy was charged on the transfer of property.  In ancient Rome, Augustus Caesar imposed the Vicesina Hereditatium in 6 A.D., a tax on successions and legacies to all but close relatives.  During the Middle Ages, English families could retain the right to use property upon the death of a family member provided an estate tax was paid.

Closer to home, the United States saw its first form of an estate tax with the passage of the Stamp Act of 1797, which required a federal stamp on wills in probate with the proceeds being used to pay war debts.  After the repeal of this act in 1802, estate taxes were used by the federal government sporadically through the 19th and early 20th Centuries, generally appearing to finance wars and then being repealed once those debts were repaid, including through World War 1.

With the Revenue Act of 1924, the estate tax became a permanent part of the U.S. tax system.  In September 1976, President Gerald Ford signed the Tax Reform Act of 1976 into law and the modern system of estate taxation was born.  Specifically, it is this law that combined the estate tax and the gift tax exemptions into the unified estate and gift tax credit.

This unified credit is the dollar amount that an individual can gift during their lifetime and pass on to heirs before gift or estate taxes apply and is sometimes referred to as the estate and gift tax exemption amount.  Since 1976, various pieces of tax legislation have decreased and increased the amount of this credit.

Where We Stand Today

The Tax Cuts and Jobs Act of 2018 (the “TCJA”) doubled the estate tax exemption, meaning for 2024, the exemption amount is $13.61 million per individual (and $27.22 million per married couple).  To put that in perspective, The Economic Recovery Tax Act of 1981 signed by then President Reagan set the exemption at $175,625 and increased that amount to $600,000 by 1987 (which would be approximately $1.65 million in today’s dollars).  In the United States, we have never seen an exemption amount as high as it currently is either in terms of dollar amount or potential impact, making today the golden (or even platinum) age of planning.

However, all good things must come to an end.  Absent any action from Congress, the current exemption regime is set to expire at the end of 2025 due to a sunset provision in the TJCA.  This will reset the exemption to its prior level (adjusted for inflation) at approximately $6-7 million per individual (and $12-$14 million per married couple).

The impact of that reset will be significant.  In essence, if you die in 2026 or later, $15-$17 million more of your estate will be subject to the 40% estate tax at your passing.  That is a substantial amount of money.  It is important to note what exactly is considered a part of your estate for this calculation.  In short, it’s everything.  And that’s not just us talking.  Here is an explanation from the IRS:

It [the Estate Tax] consists of an accounting of everything you own or have certain interests in at the date of death. The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them. The total of all of these items is your "Gross Estate." The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.**

With this change, and without proper planning, the Social Capital Tax™ will take a portion of your life’s work and give it to the government rather than to your family or charities you support.

The Path Forward

For high-net-worth individuals, proactive planning is essential to mitigate the impact of the Social Capital Tax™ while ensuring their wealth serves meaningful purposes.  For example,  Government Incentive Monetization™ can be used as a strategic approach that emphasizes leveraging wealth to create a lasting legacy for both family members and charitable causes aligned with one's values.***

By addressing Social Capital Tax™ obligations before reaching the end of life, individuals can optimize the resources available for distribution. This proactive stance not only minimizes tax liabilities but also empowers individuals to witness the impact of their contributions firsthand.

Here is another way to think about it.  When you die, your money can go to three recipients - your heirs, charity, or the government (via taxes).  By planning now, you can help create the structure so that your money will be more likely to go to who you want, when you want.  In effect, this is about creating the legacy you want.

Legacy planning goes beyond mere financial considerations. It involves crafting a narrative of impact that extends beyond one's lifetime. By integrating philanthropic goals with estate planning, individuals can leave behind a legacy that reflects their values and aspirations.

Charitable giving becomes a powerful tool in this context, allowing individuals to support causes close to their hearts while potentially realizing tax benefits. Trust structures offer additional flexibility, enabling the preservation and responsible distribution of wealth across generations.

The Time to Act is Now

When we say the time to do this planning is now, we do mean now.  

Given the current state of our politics, the chances that Congress is able to come together and extend the current exemption amounts and avoid the sunset appear slim to none.  Therefore, any planning needs to be completed prior to the end of 2025.  This is further exacerbated by the issue of access to qualified advisors.  For example, many of our attorney friends in the trusts and estate field report they are already completely booked with clients through the sunset due to the impending sunset.

As we navigate the complexities of wealth management, taxation, and legacy planning, it challenges us to rethink our approach to wealth accumulation and distribution, placing a greater emphasis on social responsibility and impact.

By embracing proactive strategies and integrating charitable giving into estate planning, individuals can shape a future where wealth serves as a force for good. As the landscape evolves and regulations change, staying informed and proactive will be essential in maximizing the benefits of wealth while leaving a meaningful legacy for generations to come.

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*Social Capital Tax™ is a proprietary concept created by ASE Private Wealth™ and not industry terminology.

**https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax

***Government Incentive Monetization™ is a proprietary concept created by ASE Private Wealth™ and not industry terminology.