Whenever pundits discuss tax policy, the Lifetime Estate and Gift Tax Exemption tends to get the spotlight treatment. Because of this, the lifetime exemption may be one of the most misunderstood provisions in U.S. tax code.

Misconceptions about the lifetime exemption are particularly important in 2023, since it presents a significant opportunity for families hoping to build lasting legacies. In this article, we’ll review the lifetime gift and estate tax estate, discuss the current opportunities, and address a few common misconceptions.

What is the Estate Tax?

First, a note on terminology. The Lifetime Estate and Gift Tax Exemption is commonly referred to as the lifetime exemption. In the media, you may hear the lifetime exemption lumped into discussions about the overall estate tax. However, these are different things.

The lifetime exemption refers to the amount of money you can give away in your lifetime without triggering the estate tax. The estate tax is the rate at which your assets beyond that exemption are taxed. (You may hear the estate tax referred to as the death tax in certain politicized conversations.)

The estate tax is a semi-new part of U.S. tax code; it was introduced in 1916 with a $50,000 exemption. Over the past century, not only has the amount of the estate tax varied, so to has the exemption level.

Don’t miss a tax planning opportunity

At the end of 2017, Congress passed the Tax Cut and Jobs Act (TCJA) which doubled the lifetime exemption—from $5 million to $10 million per person—starting in 2018.

Since the lifetime exemption is inflation-adjusted, the 2023 threshold is $12.9 million per person, or $25.8 million for a couple.

It’s the highest lifetime exemption in history, and it expires at the end of 2025. The way the law is written, the lifetime exemption will revert to 2017 levels, adjusted for inflation, unless Congress passes additional legislation to adjust the exemption. That would put the lifetime exemption at roughly $6.5 million in 2026, assuming inflation holds steady for the next three years.

While it’s possible lawmakers will indeed move to keep the exemption where it is, it’s more likely that the exemption will revert. That means anyone hoping to gift a sizeable estate to their heirs may want to do so before 2026 to benefit from the higher exemption.

Misconceptions about the Lifetime Gift and Estate Tax Exemption

Each year, individuals can gift a certain amount without triggering the gift tax. In 2023, that threshold is $17,000. If you were to gift more than $17,000, the IRS requires you to file a gift tax return. Filing this return does not trigger a tax liability. Rather, the IRS registers that gift against your lifetime exemption.

For example, if you were to gift $117,000 to a person this year:

·       Your accountant would file a gift tax return.

·       The IRS notes $100,000 against your lifetime exemption of $12.9 million ($117,000 less the $17,000 annual gift exclusion).

·       You can gift another $12.8 million in your lifetime before triggering the estate tax.

When TCJA expires in 2026, however, you would only be able to gift another $6.4 million. (This assumes you don’t gift more than $17,000 in the interim and that the lifetime exemption reverts to $6.5 million.)

For a $117,000 gift, that may not seem significant. But for anyone hoping to gift larger sums of money, it’s an important distinction. It’s especially important if any of the following apply to you:

·       You plan to gift more than $6.5 million and less than $12.9 million. Making that gift now, if you are able, could save your estate from a potentially significant tax liability.

·       You plan to gift less than $6.5 million. Even if your gifts don’t currently exceed the anticipated future exemption, they may in the future. As your assets appreciate, they may grow larger than the future lifetime exemption; gifting assets now allows them to appreciate without worrying about the estate tax.

·       You plan to gift more than $12.9 million. While you would still face a tax liability for gifting more than $12.9 million in 2023, you may still pay less overall. No one knows what future estate tax rates will be. The current rate is roughly 40%, but historically, estate taxes have gone as high as 77%. Plus, any gains on top of the $12.9 million would occur on someone else’s balance sheet.

Should you act now?

In any of these scenarios, you must be comfortable gifting the assets. You don’t want to cause financial strain in your day-to-day to secure tax benefits for your estate.
If you think you may want to make a gift, we recommend you start by reviewing your estate plan. It’s best practice to review these documents every few years to adjust for life events and changing circumstances, including changes in tax law.

Next, we can review your current assets and liabilities and discuss whether gifting assets prior to 2026 makes sense. The answer to that question may depend on your balance sheet and goals.

If it makes sense to gift assets now, we can discuss the best way to handle those gifts. Depending on your circumstances, your gift might include property, cash, or investible assets. You may want to gift these to family, organizations, or a combination.

Finally, we suggest starting these conversations sooner rather than later. An increasing number of families and individuals may seek to take advantage of this opportunity before it expires, meaning it could be hard to find appointments with the lawyers, accountants, and tax professionals who specialize in estate planning as we get closer to TCJA expiration. This is an opportunity for us to draw in a Quorum of professionals to help you make the best possible decision for your circumstances.
If you’d like to start the conversation about gifting assets, please reach out.



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