Author: J. Keith Phifer
The Unified Federal Estate and Gift Tax Exemption is currently at an all-time high due to the Tax Cuts and Jobs Act of 2017. The current law is scheduled to change in 2026, however, the results of the upcoming election could accelerate changes as early as January 1, 2021 if retroactive legislation is passed. Therefore, you may want to considering gifting before the end of 2020.
Prior to 2021, the Federal Gift Tax Exemption, which under prior law was separate from the Federal Estate Tax Exemption, had never been higher than $1,000,000.00 per individual or $2,000,000.00 per married couple. Then, in 2010, the exemption was increased to $5,000,000.00 per individual and $10,000,000.00 per married couple in 2011 and $5,120,000.00 per individual and $10,240,000.00 per married couple in 2012.
Under current law, an individual can transfer up to $11,580,000.00 and a married couple can transfer up to $23,160,000.00 over the course of his or her lifetime free of the Unified Federal Estate and Gift Tax. The current federal gift/estate tax rate is forty (40%) percent. Any transfer that is above the individual and married couple limit is subject to the 40% estate/gift tax rate.
What Does This Mean for You?
The above-mentioned exemption amount may be lowered considerably by a new administration, especially given the potential that Democrats could also control Congress. Therefore, it may be a great time to take advantage of the exemption before year-end. Strategic gifting prior to a change in law could have a significant positive effect on the overall tax liability faced by your family at your death.
How to Lock in the Exemption
To take full advantage of the existing exemption, an individual must transfer assets prior to year-end.
It is speculated that numerous changes to the gift and estate tax laws could occur next year. The potential changes include:
- a reduction in the gift/estate tax exemption from existing levels to as low as $3,500,000.00;
- an increase in the gift/estate tax rate from 40% to as high as 55%;
- an acceleration of the 2026 sunset of the current laws; and
- the elimination of the cost basis step-up for assets inherited upon a person’s death.
In addition, if you are planning to give away assets other than cash or direct gifts (for example, gifts of real estate, closely-held business interests, or less than 100% of any asset) you should start the gifting process very soon, as it is likely that appraisers and other valuation experts will become very busy as the end of the year draws near.