Senior Planning Consultant
Estate & Trust Tax Director
Every taxpayer in the United States is subject to certain transfer taxes for gifting away wealth during their life or at their death. However, each taxpayer is granted a “lifetime exemption amount” so they can make limited tax-free gifts. The 2017 Tax Cuts and Jobs Act increased this lifetime exemption amount to an unprecedented $12.92 million for 2023, but this large exemption amount will expire and be reduced by half at the end of 2025. The IRS says this is a “use it or lose it” situation. Taxpayers who want to lock in this larger exemption amount before it expires should contact their CPA and estate planning attorney. There are several planning solutions available to utilize the larger exemption before it goes away, but taxpayers need to give their CPAs and attorneys plenty of time to help them determine and execute the right solution for the taxpayer and their family.
Background
U.S. Estate Taxes
Every U.S. resident and citizen is subject to a federal “estate tax” on the transfer of wealth when they die. The estate tax is an obligation of the decedent’s estate and is paid before bequests and inheritances are distributed to beneficiaries. The highest estate tax rate is currently 40% on assets over the lifetime exemption amount.
U.S. Gift & GST Taxes
The federal government imposes gift taxes on gratuitous transfers of property made during lifetime (gifts) that exceed certain exemption limits. The generation-skipping transfer (GST) tax is imposed on transfers to grandchildren or more remote descendants that exceed the exemption limits so transferors cannot avoid transfer taxes on the next generation by “skipping” a generation. The GST tax is levied in addition to gift or estate taxes.
Here are some exclusions to estate, gift, and GST taxes.
Annual Exclusion
Every taxpayer is granted an annual exclusion from gift taxes to cover such things as birthday gifts, holiday gifts, and so forth. The annual exclusion amount for 2023 is $17,000 per taxpayer per beneficiary. This means each taxpayer can gift up to $17,000 to any other person free of gift taxes, with no limit to the number of gift beneficiaries over and beyond the lifetime exemption amount. Spouses can thus jointly gift up to $34,000 per beneficiary, with no limit to the number of beneficiaries.
Health & Education Payments
In addition to the annual exclusion, gifts in the form of direct payments of health and education expenses in any amount are fully exempt from gift and GST taxes. As long as the payments are qualified under the law and made directly to the service provider (i.e., the school or medical service provider) there is no limit to the amount of tax-free health and education gifts one may make.
Lifetime Exemptions & Portability
In addition to the annual, health and education exclusions, every taxpayer is granted a “lifetime exemption or exclusion” for a certain amount of wealth transfers made during life or at death. If a taxpayer does not use their full exclusion amount during their life or at death, they can pass their remaining unused exclusion amount to their spouse for future use. This is known as “portability” of the exclusion and requires election on a timely-filed estate tax return.
2017 TCJA Exemption Increase & 2025 Sunset
Importantly, in 2017, Congress and President Trump passed the “Tax Cuts and Jobs Act” which, among other things, increased the lifetime exemption amount to $10 million and adjusted it for inflation each year. For 2023, the lifetime exemption amount is $12.92 million, or $25.84 million for married couples. This effectively exempts 99% of taxpayers from transfer taxes and provides a significant benefit for the remaining high-net-worth taxpayers normally subject to tax.
However, these larger exemptions under the TCJA are set to expire at the end of 2025. Beginning January 1, 2026, the lifetime exemption amount will return to the previous 2017 amount of $5 million, as adjusted for inflation to date. We anticipate the inflation-adjusted amount will be roughly $6.2 million for 2026. This more than cuts the current exemption amount in half and creates a short window of opportunity for taxpayers to utilize the larger exemption amounts before they are significantly reduced.
Use It or Lose It
The IRS acknowledges this is a “use it or lose it” situation for taxpayers and understands taxpayers may engage in significant estate planning to utilize the larger exemptions before the exemptions are reduced. The IRS recently issued updated regulations affirming that taxpayers who utilize the larger exemptions will receive the full benefit of them even if they pass away after the exemption amounts are reduced (see Treas. Reg. 20.2010-1(c)(1)).
Potential Planning Recommendations
Taxpayers potentially facing an estate tax if exemption values are reduced should counsel with their advisors and consider planning solutions to lock in the current larger exemption amounts. There are several conservative planning solutions taxpayers may consider.
Outright Gifts, Gifts in Trust, SLATs & SLANTs, Life Insurance & Other Solutions
There are many other planning strategies that are available to lock in the larger exemption amounts and keep some assurance of access, if such access is desired. The details of all potential planning solutions are outside the scope of this article, but suffice it to say, where there is a will there is a way. Taxpayers should discuss appropriate solutions with their CPA and estate planning attorney soon.
Limited Time Window
Be advised, the time to begin any such planning discussions and solution implementation is now. Taxpayers are limited not only by the law’s December 31, 2025, deadline but by the practical realities of the planning process and the limited bandwidth of their advisors. The planning process may be more involved than you realize, so please contact your CPA and attorney now to discuss your estate, your needs and goals, and your planning options and preferences.
Conclusion
Time is of the essence to take advantage of the current lifetime exemptions provided under the TCJA and IRS regulations. Taxpayers who can benefit from the current $12.92 million exemption amounts (double that for spouses) should contact their CPAs and estate planning attorneys right away to discuss their estate and the best planning solutions for their needs and goals. The planning should be performed carefully to ensure both effectiveness and flexibility for any future changes in the law or family circumstances.
Please contact a WFY advisor here so they can help with your estate planning strategies. We have an entire team dedicated to gift, trust and estate tax planning and compliance. You can sign-up for our newsletter here to receive more updates.
Wright Ford Young & Co. is headquartered in Irvine, CA and is the largest single office CPA firm in Orange County. WFY is a full service corporate accounting firm offering audit, tax, estate and trust, and business consulting services to closely held company and family business owners. More information about our Firm can be found at www.cpa-wfy.com