The New Year Brings Higher Estate and Gift Tax Limits
By: Joe D. Lieberman, J.D., LL.M., Law Clerk, Morris Law Group -January 13, 2020
With Trump’s tax law changes doubling the federal estate tax exemption base level amount last year to $10 million until 2026, some affluent people decided to make big gifts in 2019. However, many high net worth individuals took more of a cautious approach and decided to wait on their gifting. Now with impeachment and the 2020 presidential election looming, some fear that the estate tax exemption might be going back down sooner rather than later.
While Republicans plan to make the doubled exemption permanent, some Democratic presidential candidates are vowing to bring the exemption back to its 2009 level of $3.5 million, with a graduated tax rate of up to 45 percent. Regardless of the election outcome later this year, now is the perfect time to examine your gifting strategy and discuss your options with an expert.
2020 Applicable Exclusion Amount and Gifting Strategy
The IRS imposes an estate tax at a current rate of 40 percent upon all assets in excess of an individual’s “applicable exclusion amount.” An individual’s applicable exclusion amount is the amount of money and other assets each individual can gift during life or pass by Will or Trust to someone other than his or her spouse free of federal estate taxes.
The amount for 2020 has been adjusted up to $11.58 million for federal estate tax purposes (increasing from $11.4 million in 2019) and is reduced by any prior taxable gifts. Additionally, through the concept of portability, the IRS permits married individuals to utilize the full $11.58 million exclusion of the first deceased spouse by the surviving spouse, effectively providing an individual and his or her spouse a combined estate tax exemption of $23.16 million.
Furthermore, the annual gift tax exclusion amount for 2020 remains at $15,000. You can give away $15,000 to as many people as you like, including your kids, your kids’ spouses, your grandchildren and their spouses. You also can make unlimited direct payments for medical and tuition expenses. If an individual is married, the married couple is entitled to gift $30,000 per individual per year. Any gift that exceeds that amount given to a single individual in one year decreases an individual’s applicable exclusion amount. If your gift does exceed the gift tax annual exclusion amount, you have to report it on a gift tax return (IRS Form 709).
While the applicable exclusion amount continues to grow larger each year as it is indexed for inflation, the amount is scheduled to sunset back to $5 million (adjusted for inflation) after December 31, 2025, unless future legislation makes these changes permanent. Additionally, the current political climate threatens to cut short the date the applicable exclusion amount is set to sunset.
SLATs and GRATs as Planning Techniques
We recommend that with the combination of the increased applicable exclusion amount, scheduled sunset date and current political climate, individuals should begin or reconsider their current estate planning. Consideration should be made whether to gift your assets now.
There are many techniques available, such as gifting to varying types of irrevocable trusts, spousal lifetime asset trusts (SLATs), grantor-retained annuity trusts (GRATs), and installment sales to grantor trusts. Gifting not only decreases the value of an individual’s estate, it also removes any potential appreciation of an asset outside of an individual’s estate, which reduces any estate tax the individual’s estate may have to pay after death.
If you are interested in learning more about the various options available, or would like to request a consultation with one of our experienced attorneys, please contact us.