Estate Planning Opportunities with the TCJA: Gift Tax Exemptions

Taking advantage of historically high gift tax limits before they disappear

The Tax Cuts and Jobs Act (TCJA) of 2017 bestowed a huge gift on wealthy families: People with large estates have an unprecedented – but temporary – opportunity to transfer a substantial amount of wealth to their loved ones without incurring transfer taxes.

Prior to the TCJA in 2017, only the first $5.49 million of transferred assets were protected from the 40 percent federal estate and gift tax ($10.98 million for married couples). But the TCJA more than doubled the amount an individual can shield to $11.4 million in 2019 ($22.8 million for married couples) – and the historically high exemption limit will continue to rise with inflation until it sunsets at the end of 2025 and reverts to 2017 levels (adjusted for inflation, of course).

The generation-skipping transfer tax (GST) exemption – the amount people can give to grandchildren or more remote generations without incurring tax – also increased to $11.4 million ($22.8 million for married couples).

Initially, there was concern that people who made major gifts under the current tax code would have to pay the piper with major tax penalties if they live beyond 2025. But the IRS recently confirmed that there will be no “clawback” on these lifetime gifts, granting wealthy individuals an opportunity to pass on millions of dollars tax-free—without fear of being hit by a 40 percent gift, estate, or GST tax later.

A quick gift-tax primer

The IRS operates a unified gift and estate tax system – meaning all the gifts you make throughout your lifetime count toward the overall exemption amount. But the IRS also permits you to give a certain amount each year without chipping away at the current $11.4 million limit.

In 2019, the annual exclusion amount is $15,000; that means you can make $15,000 gifts to as many different people as you want without any gift tax consequences. If you and your spouse split a gift, you could give the same person a total of $30,000 a year.

Transfers that exceed the gift amount must be reported to the IRS and are technically taxable, but you won’t actually owe any gift tax until you’ve exhausted your lifetime exemption. The person making the gift—or the estate—is liable for tax incurred.

There are also a few specific situations where you can give unlimited amounts without triggering the gift tax:

  • Unlimited gifts can generally be made to spouses, with no gift or estate tax due
  • Gifts to charity
  • Gifts made for tuition and qualified educational expenses, as long as payments are made directly to the college or educational institution instead of the student. This is an excellent opportunity to make transfers that benefit your children, grandchildren, or even great-grandchildren without incurring a transfer tax.
  • Gifts to cover medical expenses for someone else, as long as you pay the hospital or medical professional directly instead of the patient

Higher exemption a “use it or lose it” opportunity

The estate planning benefits of the TCJA are a “use it or lose it” opportunity – offering the potential for tremendous tax breaks to people with large estates who are proactive about transferring a meaningful amount of wealth to their family before the expanded privileges expire. These gifts can be made in several ways, including direct gifts, forgiving loans, funding trusts, or funding tax-advantaged education accounts.

There are some income tax consequences to consider before making generous gifts. For instance, when you give away an appreciated asset, the recipient assumes your tax basis in the asset and incurs capital gains tax if he or she sells it. When appreciated assets are inherited, however, the recipient’s basis is “stepped up” to the asset’s fair market value on the date of death, erasing the built-in capital gain and potentially avoiding significant federal and state income taxes on a sale.

The clock is ticking on the TCJA’s historically high exemption amounts, and families with substantial estates should carefully consider the impact of post-2025 estate and gift tax liabilities on their estate planning. Although your estate will enjoy the benefits of the higher limits if you die while they’re still available, making gifts that meet the exemption amount now can help you avoid a heavy tax hit if you live past when it’s slashed by more than half to 2017 levels.

A skilled advisor can help you to review your current estate planning strategy.

Lindberg & Ripple is an independent investment and insurance advisory firm providing sophisticated Wealth Management, experienced Investment Consulting, and innovative Insurance Solutions for wealthy families, successful executives, and business executives. Contact us to learn how we can help your family or business achieve your financial objectives while minimizing hassle, expense, and taxes.

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