Estate and Gift Tax Exemptions: Now is the Time

As a result of the Tax Cuts and Jobs Act of 2017, the federal estate and gift tax exemption is the highest it has ever been since the modern estate tax was implemented in 1916, with the single exception of 2010, when the estate tax was briefly repealed. Under current law, an individual can transfer $11,580,000 (and a married couple can transfer $23,160,000) over the course of his or her lifetime or upon his or her death, free of the unified federal estate and gift tax.

Any amounts gifted during life or transferred upon death in excess of the available federal estate and gift tax exemption are subject to a top marginal rate of 40% in federal estate tax at death, plus any taxes that may be imposed by the decedent’s state of domicile. A separate and additional generation-skipping transfer (GST) tax of 40% is imposed on transfers in excess of the exemption amount that are made to grandchildren or more remote descendants.

These current federal estate, gift, and GST tax exemption levels were never intended to be permanent. Even absent future action by Congress, the exemptions are scheduled to revert to pre-2018 levels beginning January 1, 2026, i.e., $5,000,000 per individual or $10,000,000 per married couple (with an inflation adjustment). However, depending on the results of the upcoming election, this change may be more drastic and may occur sooner. Former Vice President Biden’s recently released economic plan calls for the “wealthiest Americans [to] shoulder more of the tax burden,” including raising federal estate taxes “back to the historical norm.” Although he has not specified what numbers he has in mind, the exemptions going forward could be significantly lower than they are under current law.

As recently as 2001, the estate tax exemption was only $675,000, with a top marginal tax rate of 55%. At the end of 2012, the estate tax exemption was set to decrease to $1,000,000 per taxpayer before Congress passed last-minute legislation to retain the $5,000,000 exemption. Additionally, the second Obama administration proposed reducing the exemption amounts to $3,500,000. Given the current political climate, it would be unsurprising if exemption levels were reduced to 2017 levels ($5,000,000 per individual, adjusted for inflation) or lower. Such a change could be effective as soon as January 1, 2021, if Congress passes legislation having retroactive effect.

Although taxpayers cannot control the tax climate at the date of their death, strategic gifting prior to a change in the law could have a significant positive effect on the overall tax liability faced by a wealthy taxpayer’s family. Gifting assets outright or in trust now, while the exemption levels are still at their historic high, essentially allows taxpayers to “lock in” these high exemption amounts. Sophisticated estate planning techniques may also allow taxpayers to leverage this exemption using valuation discounts and other planning strategies, which may be especially effective in the current environment of low interest rates and falling stock prices.

Since certain assets may require professional valuations, these transactions may require time to implement, so now is the time to act in order to ensure that the transactions can be completed before year’s end. Please contact us if you would like advice or assistance regarding your estate plan.


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