{"id":22272,"date":"2024-08-06T22:00:45","date_gmt":"2024-08-06T22:00:45","guid":{"rendered":"https:\/\/www.thinkadvisor.com\/2024\/08\/06\/pe-owners-act-fast-before-the-estate-tax-exemption-shrinks\/"},"modified":"2024-08-06T22:00:45","modified_gmt":"2024-08-06T22:00:45","slug":"pe-owners-act-fast-before-the-estate-tax-exemption-shrinks","status":"publish","type":"post","link":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/2024\/08\/06\/pe-owners-act-fast-before-the-estate-tax-exemption-shrinks\/","title":{"rendered":"PE Owners: Act Fast Before the Estate Tax Exemption Shrinks"},"content":{"rendered":"<div class=\"media_block\"><a href=\"https:\/\/feeds.feedblitz.com\/-\/902450753\/0\/thinkadvisor\/\"><img decoding=\"async\" src=\"https:\/\/images.thinkadvisor.com\/contrib\/content\/uploads\/sites\/415\/2024\/08\/Tax-Rules-Sunsetting-V1-Estate-Tax-Exemption-640x640.jpg\" class=\"media_thumbnail\"><\/a><\/div>\n<div><img decoding=\"async\" src=\"https:\/\/images.thinkadvisor.com\/contrib\/content\/uploads\/sites\/415\/2024\/08\/Tax-Rules-Sunsetting-V1-Estate-Tax-Exemption-640x640.jpg\" class=\"ff-og-image-inserted\"><\/div>\n<div class=\"the-advisor bullet-summary\">\n<h3>What You Need to Know<\/h3>\n<ul>\n<li>The historically high estate tax exemption could fall by about 50% at the end of 2025.<\/li>\n<li>Planning may be especially apt for private equity principals holding carried interests.<\/li>\n<li>Clients who wait too long to engage legal and accounting experts may find themselves out of luck.<\/li>\n<\/ul>\n<\/div>\n<p id=\"first-para\">Clients with a substantial portion of their legacy wealth tied up in private equity investments have less than 18 months to prepare for the sunset of key provisions of the 2017 tax overhaul known as the Tax Cuts and Jobs Act \u2014 particularly the <a href=\"https:\/\/www.thinkadvisor.com\/2022\/12\/07\/the-estate-and-gift-tax-exclusion-shrinks-in-2026-whats-an-advisor-to-do\/\" target=\"_blank\" rel=\"noopener\">reduction of the estate tax exemption<\/a>.<\/p>\n<p>\u201cThat is just not a lot of time to get some potentially complex planning done,\u201d warned <a href=\"https:\/\/www.cbh.com\/professional\/michael-g-kirkman\/\" target=\"_blank\" rel=\"noopener\">Mike Kirkman<\/a>, a partner and certified public accountant at Cherry Bekaert. \u201cSpecific strategies such as lifetime gifting and vertical slice planning can be very effective for wealthy clients looking to mitigate their estate taxes, but they aren\u2019t straightforward.\u201d<\/p>\n<p>Adding more pressure is that legal and accounting professionals with the expertise to help clients enact these and other wealth-protection strategies are <a href=\"https:\/\/www.thinkadvisor.com\/2023\/01\/24\/why-your-next-go-to-cpa-partner-could-be-offshore\/\" target=\"_blank\" rel=\"noopener\">already in sky-high demand<\/a>. So much so that clients who wait too long may find themselves out of luck.<\/p>\n<p>\u201cThis is the busiest time for&nbsp;CPAs in a long time, certainly since the big rule changes that we saw back in 2012,\u201d Kirkman recently told ThinkAdvisor. \u201cI would actually argue that the TCJA sunset issues that we are grappling with right now are even more substantial, and they\u2019re coming at a time when the public accounting space is facing a notable talent shortage.\u201d<\/p>\n<p>Kirkman urged financial advisors and their clients with significant private equity holdings to study up on the investments\u2019 rules and requirements. While it\u2019s possible that the historically high estate tax exemption will be extended beyond 2025, that\u2019s far from a guaranteed outcome in a divided Congress.<\/p>\n<p>\u201cSo, this is likely a use-it-or-lose-it situation with respect to the current exemption amount,\u201d Kirkman said.<\/p>\n<h2>Gifting Today vs. Tomorrow<\/h2>\n<p>As Kirkman explained, the gift tax applies to asset transfers made during life rather than at death \u2014 but it does draw from the same exemption amount. So, the lifetime exemption can be used in whole or in part during life or at death, but it represents a lifetime aggregate of allowable transfers.<\/p>\n<p>Apart from the time value of money, estate and gift taxes are generally neutral as to when individuals transfer their assets to heirs, Kirkman said. Many wealthy individuals, therefore, choose to make lifetime gifts of assets instead of waiting to transfer them at death.<\/p>\n<p>In addition to allowing clients to <a href=\"https:\/\/www.thinkadvisor.com\/2024\/07\/30\/the-overlooked-virtues-of-passing-down-wealth-during-life\/\" target=\"_blank\" rel=\"noopener\">see the impact of their gifting<\/a> while they are still alive, this allows post-gift appreciation to escape the taxable estate at death, significantly reducing estate tax liability for beneficiaries.<\/p>\n<h2>Tricky Issues<\/h2>\n<p>The gifting of assets varies substantially&nbsp;by asset type, Kirkman noted. Gifting cash and liquid assets is often straightforward, but the complexity ramps up when considering private equity ownership.<\/p>\n<p>This is because a given fund manager\u2019s shares in a carried interest entity consist of multiple layers, including an \u201cownership\u201d portion and carried interest rights. The ownership portion will generally consist of the standard 2% management fee \u2014 along with any other payment rights \u2014 but it does not include carried interest rights.<\/p>\n<p>\u201cIf transferred early, the carried interest rights usually do not have a high value for gift tax purposes because the entity\u2019s investments have not yet started making large profits,\u201d Kirkman explained.<\/p>\n<p>Conversely, the ownership interest consisting of the 2% management fee and other payment rights has immediate value. Historically, Kirkman said, this dynamic has led fund managers to gift carried interest rights at low gift tax values while retaining the ownership rights, which did not have the same growth potential.<\/p>\n<p>\u201cSunset planning may be especially apt for PE principals holding carried interests,\u201d Kirkman continued, \u201csince those assets begin at lower values with the potential to increase by multiples over time.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"<p>What You Need to Know The historically high estate tax exemption could fall by about 50% at the end of 2025. Planning may be especially apt for private equity principals holding carried interests. 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