Tax Relief and the Uncertain Fate of the Estate Tax and Lifetime Gifts Exemption
In 2017, the Tax Cuts and Jobs Act (Tax Act) introduced various forms of tax relief, including a significant increase in the Estate Tax and Lifetime Gifts Exemption (Exemption). However, these tax cuts are set to expire on December 31, 2025, unless Congress takes action to extend them. With the exemption amount poised to decrease from $13.61M to approximately $7M in 2026, taxpayers who act now can take control of their wealth and save a substantial amount in taxes.
A Window of Opportunity for Taxpayers
Taxpayers who utilize the current lifetime gift Exemption before it expires can transfer more wealth to the next generation while minimizing their tax liability. According to Treasury 20.2010-1(c), lifetime gifts made during this period will remain valid even if they exceed the future exclusion amount, without fear of a “clawback” by the IRS. This means that taxpayers can transfer assets beyond the potentially lower exclusion amount in the future.
Understanding the Cumulative Accounting Method
The IRS uses a cumulative accounting method to calculate a taxpayer’s utilized portion of the Gift Tax Exemption. This method is similar to filling a bucket, where the first dollars gifted accrue against the taxpayer’s total Estate Tax and Lifetime Gift Exemption. The oldest exemption amounts are deemed to be used first, making it essential to utilize the additional 2017 exemption amount before it’s too late.
A Practical Example
Consider a taxpayer with a $17,000,000 estate who has not yet used any of their taxable Exemption. By making a gift of $13,610,000 to their daughter in 2024, they can avoid gift tax. However, if they wait until their death and the Exemption amount sunsets, their estate would pay taxes according to the lower exclusion amount of approximately $7,000,000. By gifting amounts in excess of the lower future exclusion while the additional 2017 Lifetime Gift Exemption is still available, the taxpayer can save estate taxes of over $2.3M.
The Importance of Estate Planning
With the fate of the Exemption uncertain, taxpayers should not wait for politicians to decide their estate’s fate. A carefully executed estate plan can take advantage of the current larger tax exclusions, ensuring that taxpayers can transfer more wealth to the next generation while minimizing their tax liability. By planning now, taxpayers can secure their financial future and avoid potential losses due to the expiration of these highly favorable tax provisions.
(source)
