What are the Current Gift and Estate Tax Limits?

Estate planning attorneys have had a period of time where the vast majority of their clients do not have to worry about the git and estate tax exemption amounts. In 2022 the lifetime exemption for both gift and estate taxes stands at $12.06 million per person. For a married couple, that means the exemption is $24.12 million! If your estate is that large, it's a good problem to have. That brings into play about .2 percent of Americans. But change is on the horizon. The expanded estate and gift tax exemptions expire at the end of 2025 and will revert to $5.49 million. This significant change is discussed the article “Estate and Gift Taxes 2021—2022: What’s New This Year and What You Need to Know” from The Wall Street Journal. 

Estate planning attorneys must be mindful of this likely change, which will require much more strategic estate tax and gift tax planning. For now, the good news is that in 2019 the Treasury Department and the IRS issued “grandfather” regulations to allow the increased exemption to apply to earlier gifts, if Congress reduces the exemption in the future.

For example, let’s say Josh gave assets of $11 million to a trust to benefit heirs in 2020. The transfer had no gift tax because it was under the $11.58 million for 2020. If Congress lowers the exemption to $5.49 million per person and Josh dies in 2025, when the lower exemption is in effect, as the law now stands, the estate will not owe tax on any portion of his gift to the trust, even if the trust is $6 million above the $5.49 million lifetime limit in effect at the time of his death.

Current law also has investment assets held at the time of death exempt from capital gains tax, known as the “step up in basis.” If Robin dies owning shares of stock worth $100 each, originally purchased for $5 each and held in a taxable account, the estate will not owe capital gains tax on the $95 growth of each share. The shares will go into Robin’s estate at their full market value of $100 each. Heirs who receive the shares have a cost basis of $100 as the starting point for measuring taxable gains or losses when they sell.

The annual gift tax exemption has risen to $16,000 per donor, per recipient, for 2022. A generous person can give someone else assets up to the limit every year, free of federal gift taxes. A married couple with two married children and six grandchildren could give away as much as $320,000 to their ten family members, plus $32,000 to other individuals, if they wished.

Annual gifts are not deductible for income tax purposes. They also do not count as income for the recipient. Gifts above the exclusion are subtracted from the giver’s lifetime gift and estate tax exemption. However, a married could use “gift splitting” to let one spouse make up to $32,000 of tax-free gifts per recipient on behalf of both partners. A gift tax return must be filed in this case to document the transaction for the IRS.

If the gift is not cash, the giver’s cost basis carries over to the recipient. If someone gives a family member a share of stock worth $1,000 originally acquired for $200, neither the giver nor the recipient owes tax on the gift. However, if the recipient sells, the starting point for measuring taxable gain will be $200. If the share is sold for $1,200, for instance, the recipient’s taxable gain would be $1,000.

For some families, “bunching” gifts for five years of annual $16,000 gifts to a 529 education account makes good sense. A gift tax return should also be filed in this case. Your estate planning attorney will be able to guide you in creating a gifting strategy to align with your estate plan and minimize taxes.

If you live in the Madison, Wisconsin area schedule a call with Attorney Rick Coad to discuss these and other estate planning strategies.

Reference: The Wall Street Journal (March 10, 2022) “Estate and Gift Taxes 2021—2022: What’s New This Year and What You Need to Know.”

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