Important Concerns Regarding Potential Reduction of Lifetime Estate Tax Exemptions

On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”) was signed into law, which became effective in January 2018. The TCJA made significant change to the estate and gift tax exemption, increasing the lifetime gift tax exemption for an individual from $5.49 million to $11.18 million per person. Since then, the lifetime exemption has been adjusted for inflation. Starting in 2021, the lifetime gift tax exemption for an individual increased to $11.7 million. Married couples have a collective lifetime gift tax exemption of $23.4 million.  This means that a person can give up to $11.7 million ($23.4 million per married couple) during his or her lifetime without ever having to pay a federal gift tax. In addition to the lifetime gift tax exemption, each person also has an annual gift tax exclusion in the amount of $15,000, per person, per year, which does not count against the lifetime gift tax exemption amount.

With a new administration in the White House, there are concerns that the lifetime gift tax exemption may be significantly reduced prior to 2026, possibly even by the current Congress. As of now, the current lifetime gift tax exemption amount is slated to “sunset,” meaning that it will revert to $5,000,000 effective January 1, 2026, unless Congress acts to extend the current law. While any change in the estate and gift tax is pure speculation at this point, the current administration has previously indicated that it would support a proposal  to reduce the estate and gift tax exemption to $3.5 million (or $7 million per married couple). For those concerned about a possible reduction in the estate and gift tax exemption, it may be prudent to start implementing a gifting strategy to take advantage of the current exemption amount and reduce your taxable estate. Importantly, the IRS has confirmed that there will be no “clawback” for gifts made under the current increased gift tax exemptions put in place by the TCJA when those exemptions are reduced in the future. These final regulations provide a window for strategic gift planning.

What are some gift tax strategies to reduce the size of your taxable estate?

There is the annual $15,000 gift tax exclusion for assets that you give to individuals – separate and apart from the lifetime gift exemption. By utilizing this gift tax exclusion, not a penny of your gift counts against your lifetime gift tax exemption.  The annual gift tax exclusion is per person , which means that you (and your spouse) may give up to $15,000 (up to $30,000 per married couple) per year to as many people as you would like without incurring any tax liability.  It is important to take advantage of this annual exclusion as it does not roll over if not utilized.  Any gift given during the year in excess of the annual gift tax exclusion would count against your lifetime gift tax exemption.  You will, however, need to let the IRS know that such gifts exceeded the annual limit by filing a gift tax return.

For some families, it is desirous to give money or assets to loved ones while you are still around rather than wait until after you pass.  Giving now can be a savvy tax move for families with significant wealth as both the present value and any potential growth of the transferred assets are removed from your taxable estate.

Additionally, there are other ways you can make gifts that reduce the size of your estate without utilizing your lifetime gift tax exemption.  For example, the IRS does not consider the following transfers as taxable gifts:

• Paying the medical expenses(including insurance premiums) of another person directly to the provider.
• Paying the tuition bills of a student (not including books, supplies, room and board or other similar expenses that are not direct tuition costs) directly to the institution.
• Making charitable contributions to exempt organizations.

The bottom line is that giving sooner may make more sense rather than waiting to pass your assets until after you die.  If you have any questions regarding estate planning or implementing a gifting strategy to take advantage of the current lifetime gift tax exemption amount, please contact a member of DeWitt’s Trust and Estates Group.