Most of us have found 2020 to be a year to think about what makes us most thankful. From the pandemic to the election roller coaster, and all of the “normal” things that affect our lives, now more than ever we need to think of our loved ones and more positivity. With the holiday season upon us, perhaps now more than ever, we’ve all started thinking about what gifts we can give to our loved ones.
One of the simplest estate planning techniques appropriate for holidays is gifting! The goal here is to reduce your estate value and consequently estate’s tax liability by shifting value down a generation (or more) during your lifetime. The IRS allows an individual to make tax-free gifts of up to $15,000 per year ($30,000 for married couples) to as many people as desired. With an Estate & Gift Tax rate of 40%, that’s a potential $6,000 savings for each $15,000 gift. A husband and wife, for example, can gift up to $30,000 to each of their children or other individuals every year, tax-free. If the amount of the gift to any one person is over the $15,000 annual exclusion for the year, a gift tax return is required to be filed and the amount in excess of $15,000 will be offset against the available lifetime estate and gift tax exemption.
The lifetime estate and gift tax exemption has been increased by the Tax Cuts and Jobs Act (enacted in late 2017) from around $5 million to what is now $11.58 million per individual in 2020 (which will be indexed for inflation in 2021). That means with portability, a married couple can accumulate a total of $23.16 million of wealth (based on 2020 amounts) over their lifetime and not have to worry about an estate or gift tax liability.
The lifetime exemption amounts mentioned above will sunset after 2025 and as of now, will revert back to the previous $5 million (indexed for inflation). But, as the election results determined Biden the winner, Biden’s tax plan may make that large exemption a thing of the past sooner than 2026!
So what does this mean for you? Well, the answer is the same as any tax question….. “It depends” because the answer is never one size fits all. Several factors need to be taken into consideration when estate planning. If you have appreciated assets, does it make sense to gift now and have a carryover basis? Does it make sense to leave the assets in your estate (if your estate under the $11.58 million) and take the step-up in basis on death? Is that step up in basis going to be available once Biden’s plan rolls out? Will Biden’s ultimate tax plan reduce the exemption below the $11.58 sooner than 2026? These are all questions that should be discussed with your tax advisor before making any decisions on gifting amounts greater than your $15,000 annual exclusion this year.
Finally, if you are concerned that Estate Tax Exemption may be reduced in 2021 and you and your tax advisor conclude large gifts make sense this holiday season, you need not be concerned about any future reduction in exemption amounts. As of now, the Proposed?????? Regulations indicate that the IRS will be taxpayer-friendly to those that gifted the $11.58 during their lifetime, and there will be no clawback. As we stated before, we do not know what will happen in Washington, but it’s best to talk to your advisors to determine the most beneficial path for you. Gifting is just one of the factors to consider when thinking about the holidays and how you can be generous to your Estate, and ultimately your family. Due to the potential complexity, a complete analysis of your family’s wealth should be considered in order to maximize any planning technique. Close analysis of family asset structures and wealth trajectory performed by experienced professionals might be necessary in order to maximize tax planning techniques and reduce tax liabilities.
For more information, or if you have any questions about this or any other tax matter, please contact your WilkinGuttenplan advisor.