/>i1. 2024 Lifetime Estate and Gift Tax Exemption and Looming Sunset
In 2024, the Internal Revenue Service (IRS) increased the lifetime estate and gift tax exemption to $13.61 million per individual ($27.22 million per married couple). Clients who maximized their previous exemption ($12.91 million per individual in 2022), can now make additional gifts of up to $700,000 ($1.4 million per married couple) in 2024. Clients who have not used all (or any) of their exemption to date should be particularly motivated to make lifetime gifts because, under current law, the lifetime exemption is scheduled to sunset.
Since the 2017 Tax Cuts and Jobs Act, the lifetime exemption has been indexed for inflation each year. Understandably, clients have grown accustomed to the steady and predicable increase in their exemption. However, absent congressional action, when the exemption lapses, the lifetime estate and gift tax exemption will be cut in half to approximately $7 million per individual ($14 million per married couple) at the start of 2026.
To ensure that no exemption is forfeited, clients should reach out to their estate planning and financial advisors to ensure they have taken full advantage of their lifetime exemption. Once the exemption decreases at the start of 2026, unused exemption will be lost. Indeed, this is a use-it-or-lose-it situation.
2. Ethical and Practical Use of AI in Estate Planning
The wave of innovative and exciting artificial intelligence (AI) tools has taken the legal community by storm. While AI opens possibilities for all lawyers, advisors in the estate planning and family office space should carefully consider whether, and when, to integrate AI into their practice.
Estate planning is a human-centered field. To effectively serve clients, advisors develop relationships over time, provide secure and discrete services, and make recommendations based on experience, compassion, and intuition.
Increasingly, AI tools have emerged that are marketed towards estate planning and family office professionals. These tools can (1) assist planners with summarizing complex estate planning documents and asset compilations, (2) generate initial drafts of standard estate planning documents, and (3) translate legal jargon into client-friendly language. Though much of the technology is in the initial stages, the possibilities are exciting.
While estate planning and family office professionals should remain optimistic and open about the emerging AI technology, the following recommendations should be top of mind:
- First, advisors must scrutinize the data privacy policies of all AI tools. Advisors should be careful and cautious when engaging with any AI program that requires the input of sensitive or confidential documents to protect the privacy of your clients.
- Next, advisors should stay up to date on the statutory and case law developments, as the legal industry is still developing its stance on AI.
- Finally, advisors should honor and prioritize the personal and human nature of estate planning and family advising. Over-automating one’s practice can come at the expense of building strong client relationships.
3. The Corporate Transparency Act: What Private Clients Should Know
As of January 1, 2024, the Corporate Transparency Act (CTA) requires limited liability companies and other entities (including corporations and limited partnerships) and their beneficial owners to file Beneficial Ownership Information with the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).
Importantly, Beneficial Ownership Information will not be publicly available. The CTA imposes strict confidentiality and access restrictions on data that is reported. As such, the information is not subject to Freedom of Information Act requests and will not be published on any database. This differs, for example, from many state-specific corporate reporting requirements.
The reporting period for the Beneficial Ownership Information will be gradually reduced. Entities that were in existence prior to January 1, 2024, have one year to file their Beneficial Ownership Information (until January 1, 2025). Entities created on or after January 1, 2024, will have 90 days after formation to file. Beginning January 1, 2025, new entities will only have 30 days after formation to file. Importantly, Beneficial Ownership Information reporting is not an annual requirement. Information need only be reported once. If the Beneficial Ownership Information of the entity changes, the entity must file an updated report.
Clients should review the FinCEN website to learn more information.
4. Simplifying Trust Structures for Family Offices
Many private companies and their owners inherit complex trust structures. These structures are often built up over multiple decades, by different individuals, for different reasons. In some instances, the structures are a necessary byproduct of tricky family assets and needs. In other cases, the structure is based on outdated law or inattention.
In either case, to maintain an efficient and effective family office, clients should take steps to understand and summarize the critical terms of existing trusts.
In addition, family offices should continue to take advantage of modern techniques that can be used to modify irrevocable trusts in ways that were not previously possible. These techniques include trust decanting, nonjudicial settlement agreements, trust protectors, and exercises of powers of appointment. Used correctly and carefully, these techniques can greatly streamline existing estate plans.
For an engaging and in-depth discussion of how to understand and simplify trust structures, we invite you to attend Family Office 101, Part 4 – Simplifying Trust Structures for Family Offices: Why, When, and How on Thursday, March 14, 2024, 4:00 – 5:00 p.m. CT.
5. Buyer-Favorable Shifts in the Private Company M&A Market
Coming out of a mergers and acquisitions (M&A) slump in 2023, pent-up demand for deals and increased access to capital in light of predicted lower interest rates forecast higher deal volume in the private company M&A market in 2024.
In evaluating potential M&A transactions, private companies (buyers particularly) should consider deal trends, and seek to build on market momentum, from late 2023 to achieve more favorable deal terms in 2024.
Cash deals have been on the rise since mid-year 2023, especially with financial buyers, with robust due diligence processes leading to special escrow provisions in place of holdbacks. In particular, companies should expect more M&A transactions to include separate tax escrows and stand-alone indemnification provisions for tax matters. Meanwhile, fewer transactions are requiring buyer-paid termination fees, instead requiring seller-paid termination fees or two-way termination fees.
6. Use of Earnouts in Private M&A
Earnouts are becoming an increasingly dominant factor in the private company M&A market. Corporate M&A in 2023 was at its lowest in a decade, with increased financing costs and rising stock-market valuations widening the gap between what buyers were willing to pay and what sellers thought they were worth. In an effort to bridge that gap, companies increasingly agreed to incorporate earnouts in their deals.
Earnouts reduce the amount of the purchase price that buyers pay at closing to protect buyers against the risk of overpayment if the target business does not perform as well as planned after closing. To protect sellers, purchase agreements typically include requirements that buyers support sellers in achieving the earnout milestones.
Private companies should be mindful of the risks associated with earnouts. Legal action can arise in the event the target business misses earnout milestones. From a business standpoint, the isolation of the target business from the rest of the company (for purposes of measuring progress against earnout requirements) can delay a buyer’s business strategy.
7. AI and Inadvertent Disclosures
AI technologies can benefit private companies by helping improve efficiency in financial operations, reducing costs by automating tasks such as data entry, invoicing, and expense-tracking, and enhancing customer experience. Furthermore, AI can help a private company meet environmental, social, and governance (ESG) goals by employing process improvement principles to optimize resource allocation and ensure accuracy, compliance, and improved decision-making.
Along with the benefits, AI can carry significant risks that private company boards and shareholders need to consider before implementing AI technologies. Different tools have different policies regarding saving data; while some AI tools guarantee that data entered in the tool is deleted or anonymized, others store such data, risking inadvertent disclosure of trade secrets and other confidential information if not properly protected. Other potential risks have been discovered relating to copyrighted content and accuracy of information — AI tools fabricate facts or cite nonexistent sources.
Private companies need to have a clear policy and strategy regarding AI adoption to enjoy the benefits while mitigating the risks. They should set clear goals, be aware of potential biases in AI algorithms, and ensure responsible use of AI.
For more information, check out our recent client alert on AI and inadvertent disclosures.
8. Class Action Lawsuits under the California Labor Code
Class and representative actions under the California Labor Code continue to cause problems for California companies. Claims for delayed payment of wages, unpaid overtime and minimum wages, unreimbursed business expenses, and failure to provide meal and rest periods have been brought as class actions representing all employees in California. Companies should take preventive measures to evade the resulting pressure to settle even the least meritorious claims. Options include instituting employee arbitration programs and conducting wage and hour audits.
9. Changes Under SECURE 2.0 for Employers Establishing a New 401(k) Plan
The SECURE 2.0 Act of 2022, enacted on December 29, 2022, as part of the Consolidated Appropriations Act of 2023, introduced over 90 provisions impacting retirement plans, including company-sponsored 401(k) plans. One significant change will impact not only the structure of companies’ 401(k) plans but also decisions companies will make in the M&A context with respect to 401(k) plan structure post-closing.
Subject to certain limited exceptions for new businesses and small employers, new 401(k) plans must include certain features designed to help employees save for retirement. Starting with the first plan year that begins after December 31, 2024, a 401(k) plan established on or after December 29, 2022, must:
- automatically enroll eligible employees at a minimum 401(k) contribution rate of 3% and automatically increase their contribution rate by 1% each year (up to a minimum contribution rate of 10% and a maximum contribution rate of 15%);
- provide “qualified default investment alternatives” (QDIAs) as the default investment fund for 401(k) contributions made by employees who make any investment election for those contributions; and
- allow employees who do not wish to be automatically enrolled the opportunity to remove automatic 401(k) contributions within 90 days following the first automatic contribution (collectively, Autoenrollment Requirements).
Although 401(k) plans established prior to December 29, 2022, are not required to comply with the Autoenrollment Requirements, based on guidance released by the IRS earlier this year, an exempt 401(k) plan could lose the exemption in certain scenarios. The IRS has confirmed that if an exempt 401(k) plan and a new 401(k) plan are merged, the continuing plan must comply with the Autoenrollment Requirements.
However, the IRS also has provided a special transition rule in the M&A context. Buyers that want to merge their exempt 401(k) plan with a new 401(k) plan acquired in a transaction may combine the plans and exempt the combined plan from the Autoenrollment Requirements if (1) the merger of the plans occurs no later than the end of the year following the year of the transaction and (2) the new 401(k) plan is merged into the exempt plan so that the exempt plan is the continuing plan.
To avoid losing any planning opportunities, companies engaging in a transaction involving a new 401(k) plan should, early in the transaction, carefully consider their post-closing harmonization strategy and how any post-closing merger could impact their exempt 401(k) plan.
10. New State Data Privacy Laws in 2024
Businesses should be aware of comprehensive data privacy laws taking effect in 2024 as more states aim to protect consumers’ personal data. Utah already implemented its new data privacy law as of December 31, 2023, and other states will follow suit in 2024, with the new data privacy laws coming into effect on March 31 in Washington, July 1 in Oregon, Texas, and Florida, and October 1 in Montana.
To prevent the misuse of consumer’s personal information, these laws mandate specific privacy notices, limit certain data collection, and grant individuals more control over their personal information.
Companies should consult the data privacy laws of each state in which they operate and review and update their data privacy policies and processes to ensure compliance with the new laws.
