Each individual has the right to gift a certain amount of assets during their life or at death to other parties without having to pay gift or estate taxes. This “credit” afforded under federal law is known as the “unified tax credit,” “estate tax exclusion” or “lifetime gift.” The number changes every year depending on a change in the law and/or adjustment for inflation. The Tax Cuts and Jobs Act increased the lifetime gift and estate tax exclusion from 5 million to 10 million dollars or equivalent asset value. In 2020 after adjustment for inflation, it was raised to 11.58 million for individuals and 23.16 million for a married couple.
In addition to the unified tax credit, individuals can give up to $15,000 a year to a recipient or recipients ($15,000 per gift to as many recipients regardless of how many people you gift) and not have to pay a gift tax. If you give more than $15,000 in cash or equivalent valued assets in a year to any one recipient, you should file a gift tax return. Any amount gifted over the $15,000 per year exclusion reduces the individuals unified tax credit. The person making the gift is responsible for paying the gift taxes. For example, if you gift more than the $15,000 to an individual, even a family member, you will be responsible for paying the “gift tax” on any amounts over the $15,000 exclusion. To avoid this tax, you need to report the excess amount on an IRS Form 709.
Please note that the 11.58 million dollar exception is temporary and only lasts through 2025. If, and that is a big if, the law is not changed to reduce the current unified tax credit, it is scheduled to revert back to the 5.49 million exemption (adjusted for inflation) January 1, 2026. Consequently, what action, if any, should you take before the law is changed to reduce the tax credit before the end of 2025?
If you are concerned that your total wealth may exceed any future unified tax credit or estate tax exception, you may want to consider strategies to take advantage of the existing 11.58 million dollar credit, such as gifting assets to loved ones outright or through a vehicle such as a trust or Family Limited Partnership. Other tools to transfer wealth and not subject the assets to a 40% estate or gift tax could be a Family Foundation, Charitable Remainder Trust, an Irrevocable Life Insurance Trust (ILIT) or even a Qualified Personal Residence Trust (QPRT).
There are a number of strategies to transfer a portion of your assets or future estate to the next generation without losing access to the assets during your lifetime. If you wish to discuss what, if any, steps you might consider to take advantage of the unified tax credit before it is reduced, please do not hesitate to contact our office.
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