The generous Trump era estate and gift tax exemptions are in countdown mode.
According to an article in The Wall Street Journal titled “Estate and Gift Taxes 2021—2022: What’s New This Year and What You Need to Know,” these important exemptions are set to lapse in 2025.
Does time seem to be flying for you, or is it just me?
Today my focus is on maximizing your tax-savvy wealth transfer via the lifetime gift tax exemption.
First, a little background.
For 2021, the lifetime exemption for both gift and estate taxes was $11.7 million per individual, and in 2022, an inflation adjustment boosted it to $12.06 million per person.
Consider an example.
In 2020, Josh gave $11 million to an irrevocable trust to benefit his children and filed a timely gift tax return by his 2020 income tax due date.
Was Josh required to pay any gift taxes on this transfer?
The transfer was under the $11.58 million gift tax exemption limit amount in 2020.
What happens if the estate and gift tax exemption drops to $6 million after December 31, 2025, and Josh dies on January 1, 2026?
As the law stands now, his estate will not owe estates taxes on any portion of his gift to the irrevocable trust, even if his $11 million gift in 2020 was above the $6 million lifetime limit in effect at the time of his death.
How did that happen?
In 2019 the Treasury Department and the IRS issued “grandfather” regulations to allow the increased Trump era exemption to apply to completed gifts, even if the exemption amount is reduced in the future.
Current law also excludes capital gains taxes, known as the “step up in basis,” on appreciated assets owned at death.
For example, what if Josh dies owning shares of stock worth $100 each, but originally purchased for $5 each and held in a brokerage account passing directly to his heirs?
Since they “inherited” at death, the heirs enjoy a cost basis of $100 per share as the starting point for measuring taxable gains or losses when they sell.
Did you know the annual gift tax exemption has risen to $16,000 per donor, per recipient, for 2022?
You may give as many people as you wish this amount free of federal gift taxes.
Consider this: a married couple with two married children and six grandchildren could give away as much as $320,000 to their ten family members, plus $32,000 to other individuals, if they wished.
While such annual gifts are not deductible for income tax purposes, they also do not count as income for the donees.
Gifts above the exclusion are subtracted from the lifetime gift and estate tax exemption of the donor (like Josh in our example above).
However, a married could use “gift splitting” to let one spouse make up to $32,000 of tax-free gifts per recipient on behalf of both partners.
A gift tax return must be filed in this case to document the transaction for the IRS.
If the gift is not cash, the cost basis of the donor carries over to the donees.
For example, what if Josh had given the stock now worth $100, but a basis of $5 to his loved ones with “warm hands”?
In that case there would be no “step up in basis” and the donees would pay capital gains taxes on any sale amount above $5.
That is a big difference, yes?
For some families, “bunching” gifts for five years of annual $16,000 gifts to a 529 education account makes good sense.
A gift tax return should also be filed in this case.
Your estate planning attorney will be able to guide you in creating a gifting strategy to align with your estate plan and minimize taxes.
Reference: The Wall Street Journal (March 10, 2022) “Estate and Gift Taxes 2021—2022: What’s New This Year and What You Need to Know.”