The Giant Trump-Era Gift Tax Exemption Expires Next Year. Why Private Fund Managers Better Take Note

Private equity and venture capital managers need to carefully plan their gifting strategies before the current elevated gift and estate tax exemption expires at the end of 2025. Currently, individuals can gift up to $13.6 million tax-free, and couples up to $27.2 million. After the exemption expires, it will revert to around $7 million per person. If fund managers mishandle the gifting of carried interest—profits from investment funds—they could inadvertently trigger large, unplanned tax liabilities.

A key issue for fund managers is complying with Section 2701 of the U.S. tax code, which requires that both carried interest and capital interest be transferred proportionately when gifting carried interest. If this rule is ignored, the entire fund interest could be deemed transferred, potentially leading to unintended consequences. The “vertical slice” technique allows managers to avoid this by gifting a proportionate amount of both interests. For example, gifting 10% of carried interest requires also gifting 10% of capital interest.

With the tax exemption set to expire soon, there is uncertainty about whether Congress will extend the higher limits or let them revert to lower levels. Republicans generally favor maintaining the current exemption, while Democrats support allowing it to decrease. Given the lengthy process of firming up valuations, addressing family goals, and drafting documents, managers are encouraged to act swiftly to avoid last-minute complications.

For more information see Karen Hube “The Giant Trump-Era Gift Tax Exemption Expires Next Year. Why Private Fund Managers Better Take Note” The Barrons, October 1, 2024.

Special thanks to Joel C. Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.