With the amount of wealth that is owned by people over the age of 60, a financial professional being savvy at gifting and estate planning can be a highly lucrative business over the next couple of decades. With estate planning, you are usually creating a very “trusting” relationship with those that currently own the assets and those that will eventually inherit them. This article is meant to give just a couple of quick updates on gift and estate tax limits that have recently been announced by the IRS along with some additional thoughts and ideas so you can start to have these conversations.
Gifting
The annual gift tax exclusion is going to $18,000 in 2024, versus the $17,000 that we have in 2023. That means that a couple can gift one of their kids (or all) a gift of $18,000 without the gift being taxable, or even hitting the IRS’ radar for that matter. Ok, so what about if you gift something above the exclusion amount, say $118,000? Well, it certainly does hit the IRS’ radar because you would have to fill out an IRS form 709 saying that you gifted $100,000 over the annual exclusion amount. However, that does not mean that the $100k is taxable.
This is the biggest source of confusion for a lot of consumers, and even some financial professionals. Just because you gift $118,000 in 2024, does not mean that the excess $100,000 is taxable. Then what the heck is the limit for? Any gift above that limit goes to reduce your lifetime exemption. But only when your lifetime exemption is completely used up is when you start getting taxed, whether you deplete your lifetime exemption during your life or after death. More on this in a bit.
Again, any gifts that fall below that annual exclusion do not reduce the lifetime exemption amounts. Which means a couple in the year 2024 can gift $36,000 to whoever they like. If they do that with five people, that’s $180,000 that is basically a “freebie.” For a 529 plan, you can choose to gift via a “Five Year Election” which is basically five years’ worth of the exclusion in one year, which would equate to $90,000 apiece. But let’s save 529 plans for another time.
Leveraging Today’s Exemption Amounts
The lifetime exemption for gift taxes is the same as for estate taxes. In other words, it is “unified.” And for 2024 the gift and estate tax exemption is going to a whopping $13.61 million per person versus today’s $12.92 million. That means that for a couple, the combined exemption is over $27 million. So, in my example where the person gifted $118,000 to their kid, that extra $100,000 would not be taxable unless the entire $13.61 million was already used up. If none of the exemption was used up prior to the gift, then they now have $13.51 million left as an exemption.
What about the sunsetting of the Tax Cuts and Jobs Act of 2017 that will roughly cut these exemption amounts in half? Staring down the barrel of these changes is something that should jolt wealthy families into action. Let’s use an example: Let’s say that in 2024 you have a couple that has an estate that is worth $25 million. They understand that the time to act is now because if they die with a $25 million estate after 2026, when the estate tax exemption goes to roughly $12 million for the couple (around $6 million per person), their estate will have a tax bill of 40 percent on the excess above $12 million. That is approximately $5.2 million ($13 million excess times 40 percent tax) that would go to Uncle Sam!
Conversely, what if instead that couple gifted away say $20 million in 2024? They would still have $7 million left in their lifetime gift and estate tax exemption, which means they would’ve paid no gift taxes. They would’ve also left themselves $5 million in their estate to live off of.
Now, of course, depending on how their existing $5 million estate grows between now and the time that they die, it could have an estate tax but up to this point in time, their tax has been zero and will likely never be near the $5.2 million they would’ve been subject to in our previous example. This is an important conversation to have with these folks!
A couple notes:
- The example shows how gifting a certain property today (during life) might be more prudent than passing on that same property after death, especially if death happens after 2026!
- Another benefit of gifting, especially property that is quickly appreciating, is that gifting “freezes” the value of the property to whatever the property is worth when you gift it. Conversely, if you die with that property 20 years from now, what is the amount that goes against your exemption amount? Whatever it is worth when you die!
- Gifting can have a downfall of no “Stepped Up Cost Basis” that would otherwise “generally” be achieved if the asset was transferred after death. Some assets are better to die with rather than gift.
IRS Clawback?
The IRS has indicated that leveraging today’s high gift tax exclusion is OK and will not be “recouped” after 2026 when these exemption amounts are roughly chopped in half. Think of it as an estate tax sale that is not “clawed back.” If you go into Best Buy and buy a TV that is 50 percent off but the sale ends the next day, Best Buy is not going to call you up the next day and ask for more money just because the price of that TV has increased. The IRS has been clear that the “claw back” will not happen.
In Closing
Because the previous examples show some very large dollar amounts, it’s easy to dismiss them, as if we will never need to address that type of planning. With the way inflation is going and the massive amount of wealth that is being built in our country, I beg to differ. Plus, it only takes one or two of these conversations to completely change your career!
This article was very high level and did not dive into estate issues like generation skipping transfers, irrevocable life insurance trusts, SLATS, GRATs, Bypass Trusts, etc. However, if that is what you would like some training on, drop me a line!
