Episode Description:
In this episode, host Elizabeth Ledoux is joined by Michelle AmRhein, an estate and business lawyer who works in estate planning and business succession. Tap or click the play button below to listen to: Maximizing Your Generosity: Understanding the Lifetime Gift Tax Exemption with Michelle AmRhein.
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In this episode, Elizabeth and Michelle discuss the lifetime exemption, which is also known as the lifetime gift tax exemption and is the total amount of money or assets an individual can give to others over their lifetime without incurring gift tax. They discuss the impending halving of the lifetime exemption in US estate planning and the importance of understanding and utilizing these exemptions to minimize taxes and ensure a smooth transition for businesses and families. They also explore estate planning for business owners, particularly in regards to tax implications and family dynamics.
Connect with Michelle AmRhein on LinkedIn: https://www.linkedin.com/in/k-michelle-amrhein-a1071220/
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Maximizing Your Generosity: Understanding the Lifetime Gift Tax Exemption with Michelle AmRhein Transcript
Michelle AmRhein: You’re right, you and I’ve worked together. And so you know, we understand that they’re, in addition to just like, this is a tax planning opportunity, it is really important for families to have that emotional comfort and understanding of both Well, what their are are, what their goals are together, what they’re trying to accomplish. And like you said, we don’t want them to be in a situation where you’re trading one sleepless night over one thing for another save us tonight over another concern. So the idea there is to really kind of work with them and kind of understand what are their goals? And what are they comfortable doing? And how do we get them as close as they can. We’re not trying to change exchange, one worry for another worry. And
Elizabeth Ledoux: welcome to the business transition roadmap. My name is Elizabeth Ledoux. And through my years, I have seen how communities thrive. When business succession and transition are done. Well, me and my team at the transition strategists have been helping business owners develop and implement transition strategies for over 30 years. And on this show, we want to help you by giving you the roadmap to a healthy business transition. Let’s get started. Welcome back, everybody. And today, we have a very, very special podcast, I invited Michelle Amrhein, who is probably one of the best estate, and business lawyers I’ve ever worked with in my life. She and I have worked for years together. And I asked her if she would be so kind as to come in and talk to all of us about this story on the lifetime exemption being halved at the end of 2025 in the United States, and just kind of walk us through some, you know, like, what does that mean to us as business owners, when we’re thinking about transitioning or, you know, just continuing on with our companies. So Michelle, thank you so much for taking the time to be here with us today.
Michelle AmRhein: Thank you, Elizabeth. I’m glad to be here. It’s my pleasure. And glad I can kind of share some knowledge and kind of treat this as an educational session a session to let people know what’s going on on the lifetime exemption. So yeah,
Elizabeth Ledoux: so how about tell us just a little bit about you and your background? And you know, what? Who you Yeah, just what you’re doing right now?
Michelle AmRhein: Okay, great. Well, I’m an attorney with Cohen, pain and pain and my practice areas primarily on estate planning, and this this session. So I basically just means I work with families to try to understand what their goals are, what their concerns are, when it comes to their beneficiaries, when it comes to their businesses when it comes to their assets and their legacy and their values. And how do we transition that to the next generation or to the beneficiaries and hopefully try to do that in a tax efficient way, working with their advisors like you and CPAs, and others. So that’s kind of my primary areas.
Elizabeth Ledoux: That’s great. That’s great. Well, thank you. And I, you know, I would like to just maximize our time today. So I’m just going to turn it over to you, I think that you have a couple of examples. And just to kind of a discussion for us. So yeah, let’s get started.
Michelle AmRhein: Okay, perfect. Well, I thought maybe the best thing to do is also just kind of start with kind of re letting people know and kind of revisiting kind of what the lifetime exemption is, how it works, where we are kind of how we got here, I think that it kind of always helps kind of set the framework. So the lifetime exemption is really kind of I think about it as the IRS has given us all a coupon about how much we can give away during our lifetime or upon our death to individuals other than really our spouses and charities, and how much we can give away before they start charging us tax on on the gifts that we’ve made. And so we can make some of those gifts during our lifetime, we can make some of them upon our death. But overall, at the end of the day, we have this amount that we can give away. And so that amount changes and has changed over time. The big changes that we want to talk about is in about 2017, the IRS or there was legislation to increase the amount with the IRS to about double where it had been before. And then what we’re looking at now, so this year, we’re about $13.61 million per individual. So that means that each of us can give away about 13 point 6 million I’m going around during our life or upon our death before we have to pay the estate tax or the gift tax the estate tax and gift tax kind of parallel each other. And so I kind of think about them as being a bucket and that tax rate is 40%. So if I give over that amount, then essentially I’m paying a 40% sent tax rate. So, right now at the 13 point 6 million if I’m married, then basically my husband and I, or my spouse, and I can give away double that amount, what we’re looking at is at the end of 2025. So starting January 1 of 2026, that amount will basically sunset and we will go back to the half amount. So there will be continued inflation. So, you know, we’ll have another year of inflation. But you know, at the end of 2025, we’re going to be about where we are now, cut in half, which will be about 6.8 to $7 million rough estimate based upon what inflation is, we don’t exactly know the amount. And so where this is really becoming important is where we’re really trying to remind clients is for clients who have especially closely held businesses or assets that may be illiquid, where it’s become even harder to basically pay those estate tax bills, then really what we’re thinking about is how do we kind of leverage this exemption? Well, it’s higher, and maybe think about accelerating some gifting and accelerating some transitions of businesses and illiquid assets to this to our beneficiaries, or whether the next generation before this amount, some sunsets, and it is an automatic sunset? And so it will sunset unless there’s legislation to specifically increase it, or leave it the same. Great, so I’m gonna pause there.
Elizabeth Ledoux: Great. Yeah, what a great, yeah, that’s a great, a great background on that. And I know that some people are familiar with it. And other people, you know, I’ll run into, and I’ll say, have you, you know, thought about this? Or do you know about it, and many say that they really don’t understand it and don’t know about it. And it is significant. When the tax is it’s a significant percentage. And in most businesses, you know, and especially in businesses that are, don’t have a lot of cash or lower margin, or, you know, they just are real estate oriented or something like that. It really upon death, if the heirs would have to pay that tax, it forces the sale of the business, the business they have to sell in order to pay the taxes that are due to that.
Michelle AmRhein: Exactly. And so one of the things that we like to kind of think about and one of the things we’re talking to clients, and I’m talking to clients about as like, since we kind of have this horizon hanging out there, and because the implication and the impact can be really significant. It really becomes a good time to start revisiting and and continue to to visit, does it make sense to start basically accelerating and gifting some of those assets away again, while our while we are alive and while that exemption is available to us? So one of the things that I get questions on is like, well, if I give away amount this year, you know, and I use all of my exemption, and then I pass away in the exemptions last, won’t the IRS than just send still a bill? And the answer is no. As long as I gave away an amount that I was allowed to give away, even if that amount is less when I die, but I’ve utilized that higher amount, I don’t get to have there’s not what we refer to as a clawback. So that doesn’t get to bring assets back. So I thought maybe it might be good just to walk through a very high level example. Because sometimes like hearing it kind of in the example with like a business or numbers kind of help. So that works well, then that’s what we’ll do. So. Thank you. Yeah, so I like to think about this. So we’re gonna keep it simple. I always like to use simple examples, it helps make the point I understand that every scenario is a little more complicated, and that’s okay. But let’s say that we have a business or an illiquid asset or properties, whatever that is, and let’s say the value this year is a roughly $25 million. So we’re gonna say that’s a husband and wife situation. So we have two exemptions that we get to use. So essentially, I have 20 $25 million of value. And I am willing and able, and it makes sense that during the time of 2024, and 2025, prior to the sunset, which is again at the end of 2025, I am able to give it and I decided to give it away, so we give this asset away. And basically, because when we gave it away, we each had 13 point 6 million that this year, more next year, then essentially we had sufficient exemption to use it right I have that coupon for 13 point 6 million so I turn in my coupon On my spouse turns in their coupon, the IRS says, okay, $25 million. You’ve got coupons that’s worth, you know, basically $27 million. No problem, you get to file your estate tax rate or your gift tax return, let us know that you did this, let us know your exemption but no tax bill. So then the so then we’re kind of off and then say 2026, come, the exemption amount has gone down. So we’re now back to each of us having half that amount, and something tragic happens, and we both pass away? Well, at that point, that $25 million asset is not included my estate, we’ve passed it on, we have maybe no, we have no exemption left, because the exemption has gone down to I’m gonna use $6.8 million per individual. And so we’ve used all of our exemption, we have no more exemption left, but that we’ve gotten that asset out of our estate. And like I said, there’s no clawback. So the IRS doesn’t get to say, Oh, you use more exemption than you had when you passed away. That’s not how it works. So we’ve gotten it out, we have no estate tax.
Elizabeth Ledoux: Yeah. And so in that example, your heirs would still have to pay the tax on your home or any other assets that you had over and above that business. But the business, the big chunk is out. And that’s right, significant. Yeah. So there’s still tax too, but nowhere near potentially what it would have been. Exactly.
Michelle AmRhein: And you’re right, that typically you’ll have other assets, you know, other investments or retirement assets in the home. And you’re right, those would be subject to tax. But you’ve gotten the large value, and oftentimes the more illiquid asset out of the estate. And so if I kind of walked through that same example, I have that same $25 million asset, and I didn’t get it, and then we get to 2026. And the exemption, you know, has gone down for each of us. And then we’re in that same tragic accident. And so now our estate owns In addition, those assets, and we were just kind of commenting on those other assets, it owns this $25 million asset, right, my exemption, if we take basically between the two of us, we’re again used to exemptions, assuming we have both of us a pastoral away, then essentially, we’re going to have about $14 million of exemption, right, we have 6.8, there’ll be a little more inflation for 2025. So making the numbers easy, we’re gonna have about $14 million of exemption, that means I take my $25 million asset, plus all these other things, but we’re going to leave those out there, because we’ve been paying tax on them anyway, we have our love, and we have our $14 million of exemptions. So I now have $11 million of value, right that I’m now paying a 40% tax rate on. So essentially, I have about four and a half million dollars of taxes, that’s going to be Oh, that my beneficiaries are going to have to come up with that those funds to pay those taxes. And so that’s really kind of the things that we’re thinking about. And we’re talking about when we have this horizon. Now that’s coming, and kind of creeping ever closer to us from the standpoint of timing.
Elizabeth Ledoux: Yeah, and, and so just, you know, the imagine, I think, this is what I do, I imagined that I’m the beneficiary of this beautiful business that’s worth $25 million. And I’m so excited about taking it over, and my parents passed away, which is hard enough. And then I’m faced with a four and a half million dollar tax bill that I really wasn’t expecting with a business that’s relatively illiquid, if not completely. And also, if I have siblings, we are trying to figure this out, which is a very challenging problem, typically, in a very challenging time, because they’re taking over the business and doing everything plus the loss of the parent there. So you know, when you think about it, it’s just something that I thought would be great for our listeners to start to think about and understand just what’s coming and what the implications are in their lives, how this might affect them.
Michelle AmRhein: I agree, and I’m what I’m telling individuals is so we kind of talked about really the basic approach and like everything there can be added, you know, layers of complexities from that standpoint, meaning like there’s, you know, we don’t have to use every both both spouses exemption, maybe we decide to use one spouse exemption, and when the other spouse passes away, they will still keep their exemption. So and sometimes when we’re using entities there may be opportunities for what we call valuation discounts where we get to value the interest in that business law. So then the underlying asset, the point of all of that is just that, you know, there can at times to do the maximum planning, there are steps that may need to be taken, there may be entities that need to be form, buy, sell and operating agreements need to be maybe perhaps reviewed and revised. Sometimes we want to do gifting between spouses, and we want some time to pass for those, between that gifting between spouses. And so I think the early word, my big point for takeaway, too, is like, it’s want people to have it on their mind, but also have some time to really think through the process. And so they’re not at the last minute feeling like they’re not sure about something, and is this the right decision, but they’ve had time to really process it to really walk through the steps, and it really makes sure that they’re comfortable with it, and their family is comfortable with it, and everybody kind of knows how it’s going to work. And that they’ve done kind of the maximum planning that they can rather than a, a crunch time decision that they aren’t 100% sure about, or they have to kind of really make some decisions in a timeframe that maybe is not as comfortable for them.
Elizabeth Ledoux: Yeah, and, you know, you and I’ve done a lot of work together. And so what comes to mind for me is, you know, what are some of the owners objections, and it’s like, oh, well, if I, you know, give it all up now, then I’m gonna lose control, or I’m gonna lose the ability to have an income stream that I really need, or there variety of things that, to think about there. And, you know, in that topic in that world, there’s so many things that can be done to get the asset value out, while also maintaining control, you know, like, voting and non voting type shares can be built or, and agreements can be put together on how much a person makes to operate and run that company and how that works. So a lot of different ways that you can actually get it out of your estate and transfer it so that your next generation doesn’t get put in that position. But you still are able to operate and maintain the control until you’re ready to let it go. That’s all part of just the strategy.
Michelle AmRhein: Right, right. And you’re you’re right, you and I’ve worked together. And so you know, we understand that they’re, in addition to just like, this is a tax planning opportunity, it is really important for families to have that emotional comfort and understanding about what what there are, are, what their goals are together, what they’re trying to accomplish. And like you said, we don’t my we don’t want them to be in a situation where you’re trading one sleepless night over one thing for another save us tonight over another concern. So the idea there is to really kind of work with them and kind of understand, you know, what are their goals? And what are they comfortable doing? And how do we get them as close as they can? We’re not trying to change you know, exchange one worry for another worry. And you know, that if we know you, I know that and we we work together on those type of things. So it makes you know that that is definitely one of the goals as well.
Elizabeth Ledoux: Absolutely, yeah, we like sleep full night’s. Three, go, Wow, I’m just sleeping. I got the tax thing figured out. I got the kids are good. We’ve got it all done. And I don’t have to worry. And I’m okay, as well. And yeah, the the other thing, I think that it’s important is just the keeping in mind what the what appreciation happens to because there’s this opportunity that’s here. And then, you know, you may say, gosh, you know what, my business isn’t worth that. And I don’t have a tax issue. And it’s okay, you know, for me not to worry about that. But, you know, if your business is over what would be the halved rate. If it’s over that even in the middle there, it may be okay to go ahead and transition it because you never know what the value is going to be in the future. And the appreciation, I think people sometimes forget to put that into their thinking.
Michelle AmRhein: You’re absolutely right, that oftentimes we’re looking at, like you said, if you’re not in the taxable estate, in the where we are now, but you’re kind of in that lower amount. And, and right, you don’t know what the appreciation is, will be if I you know if it’s only 12 million now and I give it out or 10 million and I give it out, and I live another 20 years and that appreciation is now higher than the exemption is then we are still in that same kind of scenario. So you’re right it’s not just a Um, from the standpoint of double the exemption, but it’s also if you’re exceeding the amount when the exemption goes in the half amount, Tom. So you’re right, there’s opportunities to get that future appreciation, as well and make sure you’re kind of planning for the long term. Absolutely.
Elizabeth Ledoux: And don’t we all, as a business owner? You know, don’t you hope that your business is going to grow and hope? I mean, that’s what you’re working with, right here, you have a strategy for growth and development and enhancement of value, all of those things are fun, and it’s part of the business kind of the business game, you know, it’s a part of winning. Yes, yeah. And then the other thing that, you know, all of this conversation, nobody knows what the inflation rates going to be, or what the taxes are going to do, or what the government’s going to, you know, vote in or not in the future. And so, I know that there’s a lot of work and thinking through this. And sometimes, in my conversations, it almost feels like gambling, in a way, you’re just going to put you’re going to do your very, very best to make the very best decisions based on the rules that are in place today. And, and kind of roll those dice. And if it’s not the right thing for you to do it, then you’re just not going to do it. Because there’s some people that won’t take advantage of this exemption, and others that will say, Gosh, absolutely, I wouldn’t miss it for anything. Right.
Michelle AmRhein: And I think that’s a lot of that conversation, like you’re saying, it’s like, understanding what what your choices are. And I think that’s a lot of that is just, you know, making sure you’re making the educated decision, and not letting it be 2026 2027. And saying, Oh, I didn’t realize that I had that opportunity. And so a lot of it is about that educated decision about it, and, and looking at ways to do it in a creative way. And an options that are out there that, like you said, that can help alleviate some of those other concerns that might be there. But we don’t know. And, you know, we, we do kind of, in a way job that you know, we know exactly the date and moment that you know, someone’s going to pass away, then plans can be perfect or closer to perfect, but we don’t, you know, in life throws us a lot of unknowns and, and things that we can’t anticipate. So you know, you You’re right, you do your best and you try to take advantage of when it makes sense to do it for your family and for your business. Absolutely.
Elizabeth Ledoux: Absolutely. Well, gosh, I always, this has been terrific. And I just, you know, I appreciate you so much, and appreciate you being here. And one of my favorite things to do at the end of the podcast is to ask, you know, just one what one thing? What one piece of advice or what one recommendation? Would you leave with our listeners and our audience, when they are starting to look at this and decide what they’re going to do?
Michelle AmRhein: Yeah, I that’s a really good question. You know, I think for from my standpoint, when I’m working with families, I think that communication and having an honest conversation with yourself, with your significant other with your spouse, and in an anon sometimes with the kids, you know, whoever’s involved about really, what are the goals? And what do you want to accomplish? Because I think if everybody kind of understands that, it can make these decisions in these transitions easier, then essentially making a decision in a vacuum. So I think communication really is important from that standpoint. And maybe my second piece is timing, because these things do take time. So it’s important to think about them sooner than later.
Elizabeth Ledoux: So basically, don’t wait until December 1 of 2025. That’s right thinking about it and reach out to your lawyer, your lawyer or your business lawyer who are buried. Because everybody else did that, too. Yes. Yeah.
Michelle AmRhein: And we’re work with the Euro visors, like you to kind of make sure that families all kind of talk to you about it, so.
Elizabeth Ledoux: Well, that’s great. Well, Michelle, thanks again, for being here and for sharing your knowledge with us and your expertise. Some, again, appreciate you and yeah, thank you.
Michelle AmRhein: Well, thank you for having me. It’s been my pleasure. And hopefully this gives everybody a little kernel of information to move forward that can have big impacts. Perfect. All right. Thank you.
Elizabeth Ledoux: Thank you for listening to this episode of the business transition roadmap. If you’re listening to this and you find yourself wanting to go deeper into these topics and start the process of putting together your transition strategy, I’d love to offer you a free initial strategy session with my team, where we’ll help you to explore the future transition of your business, head over to www.transitionstrategists.com To schedule a call. Thank you again for listening, and I’ll see you on the next episode of the business transition roadmap.
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The Business Transition Roadmap with Elizabeth Ledoux
How do communities thrive? When businesses experience healthy growth and transition. Join CEO of The Transition Strategists, Elizabeth Ledoux as she and her guests identify what makes a successful business transition roadmap. If you know you want to transition or exit your business “one day”, today is the right day to start planning. This show will give you the roadmap.
