The federal gift and estate tax exemption was enacted in 1916, and right now, it is at the highest it has ever been. What this means is that you can pass more to your heirs today, without paying any federal gift or estate tax, than ever in the past century.
In 2020, anyone can give away up to $11.58 million during their lifetime or at death without being subject to federal gift or estate tax. A married couple receives double the amount, $23.16 million. So, if a husband and wife with assets of $23.16 million both died in 2020, their estate would not be subject to federal estate tax. However, any amount over the exemption would be taxed at a 40% rate.
Why would you want to make large gifts now?
In 2026, the gift and estate tax exemption amount is scheduled to be cut in half. But, many believe the exemption amount will be cut before then, possibly as soon as 2021. Congress could also eliminate or scale back estate planning techniques that leverage the exemption amount or impose additional taxes on top of the existing federal estate tax.
Gift now, or wait?
The potential for change in the gift and estate tax rules raises an important question if you are concerned about estate taxes. You need to carefully consider if you should make gifts in 2020 and use your current exemption or wait and possibly risk losing it?
The chart below shows the estate tax exemption amount over the past 20 years and projections for the next five years. The exemption amount has been trending up (except in 2010 when the federal estate tax was repealed for one year).
The history of steady increases over the past 20 years is why many people think Congress will roll back the exemption amount. Congressional proposals range from eliminating the exemption to adjusting it back to either the 2009 or 2017 amount. The estate tax rate could also increase from the current 40% to anywhere from 45% to 77%.
Additional proposals have been made to repeal the “step-up” of income tax basis for the property that transfers at death and to impose a “deemed realization” of capital gains at death, which means capital gains tax would apply to assets when they transfer at death.
Who should consider gifting now?
If you think your estate could be subject to federal estate tax at your death, consider gifting in 2020. If your estate is below the current exemption, you still may want to consider gifting since the exemption could go down in the future and could affect your estate.
We can help you find the best time to gift or determine how much to give and find gifts that offer the best tax benefits. We can also provide guidance to help you effectively communicate with your beneficiaries, and we can outline the pros and cons of using a trust to make your gifts.