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Understanding the three-year window for gifting

When Congress passed the Tax Cut and Jobs Act (TCJA) in 2017, the lifetime gift tax exemption doubled. Because it is tied to the cost of living, the 2023 lifetime gift tax exemption is $12.92 million for individuals and $25.84 million for married couples. Based on this increase, a married couple who had maxed out their lifetime exemption in 2022 could gift an additional $1.72 million in 2023, which could be a big benefit for families whose business and real estate assets have appreciated significantly over the past few years.

Beginning in January of 2026, however, the lifetime exemption will be reduced by 50%. Based on the 2023 lifetime exemption, this means an individual could shield $6.46 million from federal estate and gift taxes, while a married couple could shield $12.92 million. This change will significantly impact how a family plans for the ownership transfer of their business and real estate and leaving them asking, “How do I plan for a future that is so uncertain?” It would be great if Congress amends the tax law to push back the “sunset” date on the lifetime gift tax exemption, but relying on Congress for your succession planning is not a good strategy. Instead, here are three ideas to get you started.

1.  Get a valuation of your business and real estate from objective appraisers who understand the LBM industry. For the business valuation, the appraisal should begin by answering these questions:

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–  Q: What is the purpose of the valuation? A: Gift/Estate Tax.
–  Q: What is the type of value? A: Equity Value.
–  Q: What is the valuation date? A: The month-end for which you have the most recent financials.
–  Q: What discounts are allowed? A: In a Gift/Estate Tax valuation, discounts for lack of marketability should always be considered and discounts for lack of control should be considered based on the specific interest to be valued.

2.   Conduct a post-ownership cash flow analysis to determine if your assets can fund your lifestyle. What we need to determine is how to make your current lifestyle sustainable following your exit from the business.

3.   Make gifts to family members. Each time you make a gift that exceeds the annual gift tax exclusion ($17,000 per person in 2023 for individuals and $34,000 per person for married couples), you will need to have the business valued and file a gift tax return along with a report that defends the valuation. If you are married and the aggregate value of your initial business and real estate appraisals are close to or exceed $12 million, the next three years are critical because you could end up with assets that exceed the lifetime exemption in 2026. Potential gifting ideas include:

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–  Setting aside a portion of the business or real estate in a Spousal Lifetime Access Trust (SLAT).
–  Begin transitioning ownership to the next generation. Based on age and competence, the use of share classes or voting and non-voting shares can be used so that you can maintain control regardless of the percentage interest gifted.
–  If an intrafamily transfer is not an option, you could sell at least 30% of your business to an ESOP or cooperative and reinvest the proceeds in a Family LLC that invests in stocks and bonds of U.S. corporations. This may allow you to defer paying capital gains taxes on the sale while teaching future generations about prudent asset management.

Knowing where your net worth stands today allows you and your advisors to make the best decisions for an unknown future. If you have not considered gifting, it is worth spending time talking to a knowledgeable advisor so you can protect your business and your net worth.

Stratus Wealth Advisors owner and founder Sam Brownell helps independent dealers by quarterbacking a comprehensive succession planning process to provide clients with essential data and advice to make the best decisions for their company and their family. Reach Sam at sbrownell@stratuswealthadvisors.com.

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