Gifting Opportunities

While there have been dramatic changes in Estate tax laws over the last 20 years, more estate tax reform is highly probable. Under the current tax laws, you can make lifetime gifts of $11.7 million without being subjected to federal estate taxes. This exemption may likely change under the current administration. Given that the Democrats are in control of Congress in 2021.

It is important to realize that the Federal Estate Tax exemption amount, i.e., the amount a person can gift during lifetime or transfer at the time of death without being subjected to estate taxes was $675,000 in 2001. At the same time, the top tax rate at the date of death was 55%.  By 2010, this tax exemption was increased to $5 million per person – representing a more than 7 fold increase in the threshold, while the tax rate was dropped to 35%.  This tax rate was increased to 40% in 2013 and continues to remain at that rate today.  However, under the Tax Cuts and Jobs Act (“TCJ Act”) in 2017, the exemption was doubled to $10 million per person, subject to inflation. By 2021, the exemption amount is now at $11,700,000.  Due to the sunset provisions of the TCJ Act, the exemption amount will return to $5 million in 2026 unless the laws change prior to that time.

In 2020, Biden campaigned to revise this exemption amount from $11.7 million down to $3.5 million per person, and to increase further increase the rate from 40% to 45%. Further, the campaign proposed to eliminate the basis adjustment for all assets. It remains unclear whether his plan would result in capital gains being realized and paid at the time of a person’s death.

Learning to take advantage of opportunities under the tax rules to make gifts without utilizing your Estate Tax exemption is always the first step in good housekeeping. Consider some of the following opportunities:  (i) The laws currently allow gifting annually to any person up to $15,000 each year without utilizing any tax exemptions. Additionally, a taxpayer can gift up to five years of annual exclusion to create a 529 College Savings Account) without utilizing any their exemptions. Taking advantage of this rule, a single person could fund a college education account with $75,000 on behalf of a child or grandchild, and a married couple could fund an account with $150,000; (ii) A parent can also make payments of college and medical expenses directly to the third party, while continue to make the usual annual exclusion gift of $15,000 directly to the child in the same year.  Over the course of many years, these simple gifting techniques can be very effective at reducing the size of a person’s estate, and therefore reducing their future estate tax exposure; (iii) Another technique is to make large taxable gifts.  The IRS has confirmed that anyone making sizeable gifts, and the exemption amount is reduced in a later year to an amount below the value of the gifts made, those gifts would be grandfathered with no tax applicable.  Given the exemption is set to decease to $5 million in five years and the possibility that this new administration will reduce the threshold sooner – we should take advantage of the current exemption levels or be prepared to lose it. 

As a result of possible estate tax changes under the new administration, you should review your current estate plans and work with professional advisors on the necessary steps to take to reduce or eliminate your own tax exposure.  For more information on gifting or finding the right professional advice, please contact us; we will be more than happy to help you.