One of the big changes in the last sweeping tax reform in late 2017 was the doubling of the gift and estate tax exclusion, referred to as the basic exclusion amount, from $5.79 million to approximately $11.58 million. If you are a couple, that is from $11.58 million to $23.16 million. The result is an additional $6 or $11 million of assets you can transfer to your beneficiaries via gift or estate, tax-free!
So what could be the problem?
The tax cuts are set to expire after 2025. Which means we have 5 more years to enjoy this benefit. Understandably there is expectation or fear that the IRS would try to claw back gifts made above the $5.79 million threshold when the exclusion goes back to the old amount.
However, there is relief to alleviate this fear. If you are planning on making gifts now through 2025, this regulation protects these gifts even after the tax cuts expire. This is because the new IRS clarification provides a choice to use the current rules or the rules in place when you die, whichever makes more sense.
While the new regulation raises and settles some concerns, it also provides a good reminder why estate planning is important for everyone. Here are a few factors to consider:
- Keep giving planned gifts. Your current gift planning strategy does not have to be suspended because of future estate limit uncertainty. This is important if part of your current gift strategy includes funding college 529 plans for children or grandchildren through current annual gifts.
- Gifts are only part of the equation. For people with estates less than $5.79 million, gift-giving might not be the most tax-advantaged strategy. By holding the full estate until death, assets will transfer to beneficiaries at fair market value. This is referred to as “stepped up basis” and potentially reduces future capital gains tax.
- Planning is key. Whatever your personal situation, tax law can be filled with ever-changing tax traps. The best approach is to develop a plan and be flexible as rules change.
As we are counting down to a new year, now is the time to figure out your strategy. It’s never too early to develop a tax-advantaged plan for your assets.