You can't take it with you, so make sure it gets to those you love

You’ve devoted your best years to growing your business and accumulating wealth, which you hope to enjoy in your next chapter and eventually bless your loved ones or favorite charities. You also want to ensure that this wealth gets distributed according to your wishes instead of getting consumed by taxes both now and after your death. To accomplish this, there are things that you can and should do now.

Prior to the effective date of the Tax Cuts and Jobs Act of 2017 (TCJA), the lifetime federal estate tax exemption amount for a single person was $5,490,000. Post TCJA, the 2017 lifetime federal estate tax exemption amount for a single person substantially increased to $11,180,000. Since TCJA’s inception, the lifetime federal estate tax exemption amount, which is adjusted annually for inflation, has increased slowly, but steadily to the 2022 amount of $12,060,000. In 2022, the annual exclusion amount for a single person for gift tax purposes was $16,000.

The high level of inflation was a prevailing theme for most of 2022; consequently, a larger than normal increase of the lifetime federal estate tax exemption amount was expected. The 2023 lifetime federal estate tax exemption amount is $12,920,000 for a single person ($25,840,000 for a married couple). This $860,000 ($1,720,000 as a married couple) increase marks the highest annual increase in the Estate Tax Exemption amount since TCJA’s enactment. Additionally, this year, the annual exclusion amount for a single person for gift tax purposes rose to 17,000/person.

With TCJA’s exemption amounts and provisions due to sunset in 2026, the expected increase of $860,000 ($1,720,000 per married couple) presents an important opportunity for individuals and married couples who have already completely used up their lifetime federal estate tax exemption amounts. Likewise, with one political party’s consistent campaign theme of drastically lowering the federal estate tax exemption amounts to pre-TCJA levels, the 2023 increase potentially provides a limited window for taxpayers to use up record-high lifetime exemption amounts. The taxpayers who previously used up their lifetime federal estate tax exemption amounts, can now gift an additional $860,000 per person, a steep rise from prior years. Additionally, the increased annual gift tax exemption amount of $17,000 will further allow taxpayers, who are on the bubble of having an estate that exceeds the federal estate tax threshold, or estates, which already exceed the federal estate tax threshold, limit the further growth of their estates through lifetime gifts. By utilizing lifetime gifts of under $17,000 ($34,000 for married couples) annually, these individuals can shelter the gifted assets that would otherwise be taxed as high as 40% after their death if their estates exceed the federal estate tax exemption amount.

The TCJA provides that the lifetime federal estate tax exemption will revert to $5 million (adjusted for inflation) on January 1, 2026. Nevertheless, the IRS has clarified that if any lifetime federal estate tax exemption amounts in excess of $5 million are used prior to 2026, taxpayers will not lose their use of the higher exemption amount, no matter the exemption amount when they die. However, they could lose any unused exemption over $5 million if not used before 2026. Therefore, there is an excellent opportunity for taxpayers in such a position to gift more than the “bonus exemption” amount that would otherwise be lost after 2026. Not only can they shelter the amounts gifted from federal estate tax, but also reap the appreciation of those assets after they make the gift.

In closing, the time is now for prudent gifting as part of an overall estate planning strategy. Please consult your financial advisor, accountant, and legal counsel to see how to avoid having this opportunity pass you by.