Now Is Not The Time To Watch The Sunset – Planning Considerations For Potential Changes To The Estate And Gift Tax Exemptions

Brief History of Estate Tax

• Stamp Act of 1797
• Revenue Act of 1862
• War Revenue Act of 1898
• Revenue Act of 1916
• Tax Reform Act of 1976
• Economic Recovery Act of 1981
• Omnibus Reconciliation Act of 1993
• Taxpayer Relief Act of 1997
• Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)
• 2010 Tax Relief Act
• American Taxpayer Relief Act of 2012
• Tax Cuts and Jobs Act of 2017 (TCJA)

Estate Tax Exemption

Tax Cuts and Jobs Act of 2017 (TCJA)

• 2012:
  • The American Taxpayer Relief Act of 2012 was passed on January 1, 2013, avoiding sunsetting exemption  Federal Gift and Estate Tax Exemption:
    • $5.12 million
  • Implemented spousal portability
• 2018:
  • Tax Cuts and Jobs Act became law on December 22, 2017
  • Doubled Federal Gift and Estate Tax Exemption:
    • $11.18 million
  • Continued spousal portability

Federal Estate and Gift Tax

• 2024:
  • Annual Exclusion: $18,000
  • Federal Gift and Estate Tax Exemption:
    • $13.61 million
  • Spousal portability
• 2025:
  • Annual Exclusion: $19,000
  • Federal Gift and Estate Tax Exemption:
    • $13.99 million
  • Spousal portability
• 2026:
  • The 2017 Tax Cuts & Jobs Act expires on December 31, 2025
  • Federal Gift & Estate Tax exemptions will drop back down to $5 million, indexed for inflation, so approximately $7 million
    • (unless Congress takes action before then)

Window of Opportunity for Substantial Gifting Between Now and 2026

• More time to make "use it or lose it" gifting decisions
• Making large gifts now won't harm estates after 2025 _{84 Fed. Reg. 64,995, (Nov. 26, 2019)}
• Risks to further delaying gifts:
  • Asset appreciation between now and the date of the gift (future gift of appreciated asset uses more exemption than a gift now)
  • Congress could act sooner to reduce exemptions or prohibit common gifting strategies (Grantor Trusts, discount rules)

Gifts Must Be Substantial

• Ms. Doe makes a gift of $2 million in 2024 (when the exemption amount is $13.61 million) but later passes away in 2026 when the exemption is $7 million. So, Ms. Doe's applicable exclusion amount is $5 million (the prior gift reduces exemption).
  • $21 million estate
  • Less: $ 5 million rem. exemption
  • $16 million
  • x 40% tax rate
  • $6.4 million of estate tax
• Important: To take full advantage of tax savings, gifts must exceed what the exemption will be reduced to!

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