How to Avoid Paying An Extra $2.4 Million in Gift and Estate Tax.

Good to Know

A married couple, both U.S. citizens, can jointly gift or bequeath as much as an astounding $24,120,0001 in 2022 without paying gift, estate, or generation-skipping transfer taxes. Each spouse has a $12,060,000 exclusion for gift and estate tax plus a generation-skipping transfer tax exemption of that same amount for 2022. These exclusions and exemptions have risen by an astounding 1,800% (approximate) in the last two decades, going from only $675,000 per person in 2001 to their current stellar levels.

Alarmingly, these unprecedented levels of exclusion and exemption are in jeopardy from at least two sources: Acts by the current congress and the 2025 scheduled expiration of portions of the 2017 Tax Cuts and Jobs Act (TCJA).

Jeopardy #1: Acts of Congress

The President and key congressional leaders proposed a 50% reduction in the amount that could be transferred without gift, estate, or generation-skipping transfer tax in the fourth quarter of 2021; the reduction could have cost high net worth clients $2.4 million in added transfer taxes. While it’s been radio silence since the 2021 proposal, the risk remains in 2022. We may or may not see this proposed 50% slashing become a short-term reality, depending upon the political power and will of the President and key congressional leaders.

Jeopardy #2: 2025 Expiration of Portions of TCJA

The TCJA effectively doubled the gift and estate tax exclusion and the generation-skipping transfer tax exemption on January 1, 2018. Because of that historical increase, we see the unparalleled level of exemptions and exclusions available to our clients in 2022.  However, transfer tax exemptions and exclusions will sunset (expire) in 2025, falling to an estimated $6.4 million per person. Unless Congress acts otherwise before the sunset, high net worth clients will lose almost one-half of their current +$12 million in transfer tax shelter.

Summary

Summary

The question before many high net worth clients is, “Should I act now to make gifts, or should I wait and see what happens in the future?”  While an experienced estate planning attorney should give the specific answer, the advisor may be in a perfect position to raise awareness of the critical issues. For example, the risk of acting now is the potential loss of the donor’s control over the gifted assets. The possible loss of millions in gift, estate, and generation-skipping transfer taxes is the risk of doing nothing now.

Next in This Series

It’s a rare client that does not value control over their wealth, and therein lies a tension. Lifetime gifts and lifetime generation-skipping transfers frequently require the donor to relinquish control over the transferred property. However, our next blog in this series will address this tension as we reveal potential strategies to simultaneously reduce transfer taxes and preserve as much of the donor’s control as possible.

 

Disclaimer

The information presented herein is provided purely for educational purposes and to raise awareness of these issues; it is not meant to provide and should not be used to provide gift, estate, generation-skipping, or financial planning advice of any kind. An experienced estate planning attorney should advise clients in these transfer tax issues. There are variations, alternatives, and exceptions to this material that could not be covered within the scope of this blog.

1 Assumes no prior year taxable gifts, bequests, or generation-skipping taxable transfers. The exclusion and exemption available to a client in 2022 are reduced to the extent of prior year taxable gifts, bequests, and generation-skipping transfers.