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Don’t Forget to Consider Estate Planning and Gifting Strategies

Questions often arise related to estate planning and gifting.  Fortunately, the current estate tax exemption amount for 2020 is $11.58 million, so many individuals no longer need to be concerned with federal estate tax.  This exemption amount is per person, so a married couple could potentially shield up to $23.16 million.  However, the current exemption amounts are scheduled to revert to pre-2018 levels ($5 million individual, $10 million married) beginning in 2026 unless Congress acts, so this is something to keep an eye on.  The exemption amounts apply to gifts made during lifetime and to transfers (i.e. inheritances) after death.   

OBSERVATION:  If there is a change in political leadership later this fall, it’s very likely the lifetime exemption will drop much sooner than 2026.  In some cases, lifetime gifts before next year may be prudent. 

Even if you are far from these upper limits, there are some strategies to consider.

Plan gifts that use the annual gift tax exclusion

The current annual gifting exclusion amount for 2020 is $15,000 per person.  If you gift more than $15,000 to any single person, a gift tax return filing is required; however, there is no actual gift tax to pay unless you exceed the lifetime exclusion noted above.  One of the benefits of using the gift tax annual exclusion to make transfers during life is to save estate tax. This is because both the transferred assets and any post-transfer appreciation generated by those assets are removed from the donor’s estate. 

Consider the differences between gifting and inheritance

There is an important distinction between the tax treatment to the recipient in a gifting situation versus an inheritance situation.  Making a gift of appreciated property carries a potential income tax cost because the recipient receives the donor’s basis upon transfer. Thus, the recipient could face income tax, in the form of capital gains tax, on the sale of the gifted property in the future. On the other hand, if the same property were transferred via inheritance after death, the gifted property’s tax basis is automatically “stepped up” to the fair market value of the property at the time of death.  Therefore, the immediate sale of such inherited property would incur no capital gains tax.  If there’s no concern that an estate will be subject to estate tax, even if the gifted property grows in value, then the decision to make a gift should be based on other factors.

Take spouses’ estates into account

In the past, spouses often undertook complicated strategies to equalize their estates so that each could take advantage of the estate tax exemption amount. “Portability,” or the ability to apply the decedent’s unused exclusion amount to the surviving spouse’s transfers during life and at death, became effective for estates of decedents dying after 2010. If the election is made, portability allows the surviving spouse to utilize the unused portion of a decedent’s applicable exclusion amount (the deceased spousal unused exclusion amount) as calculated in the year of the decedent’s death. The portability election gives married couples more flexibility in deciding how to use their exclusion amounts. 

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