The TCJA is set to expire at the end of 2025. Let’s assume that the estate and gift tax exemption amount has increased to $14 million by this time (due to adjustments for inflation). In that case, if Congress does not act, the exemption amount would decrease to about $7 million per person or $14 million per married couple. This loss in exemption amount could increase overall transfer taxes for certain families by millions of dollars.
We’ve been in a similar position in prior years and have seen that congressional gridlock can make reaching an agreement on preserving or increasing the exemption extremely difficult. While it is uncertain what, if any, tax-related legislation will come out of Congress in 2024 and 2025, it may be wise to explore one’s options to use the current existing exemption well before 2026.
If you can afford to use a portion or all of your existing exemption amount before Jan. 1, 2026, the amount used now cannot later be taken away from you. It has also been confirmed that if you use more exemption during life than is available at death (due to the decrease), the IRS cannot impose estate tax on those “excess” gifts as part of the taxpayer’s taxable estate when they pass. (Please note that there are some minimal exceptions to this rule for certain types of gifts made within three years of death.)
In addition, it’s important to note that when using your exemption during your life, you use it from the “bottom up.” This means that if you have $12.92 million of exemption and you use $6 million by making a gift (leaving you with $6.92 million), if the exemption amount is then cut in half, the $6 million of exemption you have used is considered to come out of the remaining amount, not the amount that was taken away.
In the above example, if you make a $6 million gift and the exemption amount is cut in half from $14 million to $7 million, you will have only $1 million remaining for future gifts or to shield assets from taxes upon your death. Consequently, locking in the exemption amount that may be taken away requires large gifts close to or at the full exemption amount before the amount potentially drops.
Below are some estate planning strategies for gifting to discuss with your advisers:
- Irrevocable trusts for children/descendants. You can create an irrevocable trust or trusts for the benefit of younger generations and utilize your existing gift and GST tax exemption amount, if desired. Consider a Crummey trust or other discretionary irrevocable trusts for descendants to gift assets you anticipate will appreciate greatly. By taking advantage of transferring or gifting assets (and their future appreciation) now, you use an exemption amount you would otherwise lose after the sunset.
Don’t overlook this possible additional benefit
As an added benefit, if you live in one of the 12 states (or the District of Columbia) that has a state-level estate tax, gifting will typically reduce the amount of state estate tax owed when you pass.
If the loss of the current transfer tax exemption amounts could negatively affect your family, we recommend you speak with your wealth planning advisers and your estate planning attorney to discuss if the existing planning opportunities would be right for your individual situation.
Tracy A. Craig is a partner and chair of the Trusts and Estates Group of the Seder & Chandler law firm in Worcester, Mass.
