Tis the Season…

Legal Alert

October 14, 2020

Gift Tax

Well, not quite yet. But it’s not too soon to start thinking about gifts, particularly gifts which use your lifetime exemption. That is, the amount that you can gift during your lifetime without incurring a federal gift tax, or the amount that can pass at your death without incurring federal estate tax.

Under the 2017 Tax Cuts and Jobs Act (TCJA), the lifetime exemption increased and in 2020 it is $11,580,000. The exemption adjusts annually for inflation, and in 2026 is scheduled to revert to its pre-TCJA level, roughly one-half of what it is now.

So what is the rush? While we leave the predictions to the political analysts, the potential for change exists and therefore you should consider making lifetime gifts before the end of 2020 to take advantage of your exemption.

Consider the possibilities:

The exemption remaining at its current levels, increasing for inflation over the next few years, until 2026 when it will revert to its pre-TCJA amount, increased for inflation, effectively putting the taxpayer in a “use it or lose it” situation.
A decrease in the exemption to pre-TCJA levels, or perhaps a reduction to $3.5 million, plus an increase in rates (the top federal estate and gift tax rate is currently 40%).

The bottom line is that if you are planning use your exemption there is no reason to wait until 2021. Current tax planning advantages could be eliminated, e.g., legislation introduced anytime in 2021 could be effective as of January 1, 2021.

One more thing to consider, state gift tax and state estate tax. While most states do not have a gift tax, Connecticut does and its gift tax exemption is less than the federal exemption. New York does not have a gift tax, however, it does add back to its estate tax base gifts made within 3-years of death. Since the New York State estate tax exemption is less than the federal exemption, the add back will increase the New York estate tax.

Regardless of whether you may be making a transfer of the exemption amount or a more modest gift, to illustrate the estate tax savings of gifting consider a gift of $1,000,000 which is invested and results in a 6% return over 5 years. In 2025 the original $1,000,000 would be worth $1,338,226. That additional $338,226 is completely removed from your estate and not subject to estate tax. Based on the current 40% estate tax rate you have saved your heirs $135,290 in tax.

If you have any questions regarding this client alert, please contact your Private Wealth Services counsel at Smith, Gambrell & Russell, LLP.