Anticipating Changes in the Federal Estate and Gift Tax Exemption

The Tax Cuts and Jobs Act increased the estate and gift tax exemption to its current level of $11.58 million for a single individual and $23.16 for a married couple. If you have not considered taking advantage of the opportunity to reduce the size of your taxable estate by gifting away assets during your lifetime, and you are in a financial position to do so, you should be doing so as soon as possible.

Between the unprecedented expenditure of money by the federal government in 2020 and the outcome of the 2020 elections, dramatic changes in the tax laws, including reduction of the estate and gift tax exemption, are entirely likely.

Do not rely on the sunset provision of the TCJA

You may get a better appreciation of the importance of taking full advantage of the benefit of the current estate and gift tax exemption under the TCJA by remembering the exemption was only $5.49 million for estates of individuals dying or gifts made before December 31, 2017. It almost doubled for estates of people who died and for gifts made after January 1, 2018, with adjustments for inflation bringing it to its current level of $11.58 million per person.

Another point to ponder about the estate and gift tax exemption is that even if a new Congress elects to take no action to change the tax laws after the 2020 elections, the exemption is subject to an automatic sunset provision incorporated into the Act. As of January 1, 2026, the exemption reverts to $5 million with annual adjustments for inflation unless Congress decides to tinker with the law to increase tax revenues ahead of that date.

Regardless of what happens in November, at the moment, gifts completed prior to December 31, 2020, will be subject to the current gift and estate tax exemption. Gifting assets to your heirs now rather than making provision in a will or trust to pass the assets on to your heirs after your death provides the following advantages:

  • A husband and wife can make gifts to each other in a manner that removes the assets from their estates for estate tax purposes, but during their joint lifetimes, they retain control of and the benefits from those assets.
  • It gives the donor the opportunity to be witness to the benefits derived by the recipients of the gifts.
  • The increased value over time of assets gifted during your lifetime is not part of your estate at the time of your death.

If you wait to make use of the gift and estate tax exemption, it could be lost due to new tax laws, changes in existing laws, or the sunset provision already in place in the TCJA.  I have been referring to it as a use it or lose it situation.  If you make a gift that uses all or some of your lifetime credit and the credit is subsequently reduced below the amount that was gifted, you will have saved a minimum of 40% (the current gift and estate tax rate) on that excess.  If the credit is reduced in the future and you did not take advantage of it, it will have been a lost opportunity.  This is obviously not for everyone, but if your estate exceeds the credit amount or is anticipated to do so in the future, you should at least consider doing something.

Speak with a trust and estate planning lawyer

The trust and estate planning attorneys at Magee & Adler, APC, offer trusted and knowledgeable advice about available options for preserving your rights against changes in the laws affecting estates, trusts, and estate planning. Call them today at 562-432-1001 to schedule an appointment.