In a little more than two-and-a-half years, it will be 2026. That’s when the historically high estate tax exemptions are scheduled to sunset to $5 million, the 2017 level, adjusted for inflation. Most think that number will be around $7 million.
2026: A Crystal Ball Would Be Nice
Obviously, Congress and the president can change that—increase the exemption, lower the exemption, or eliminate the “death tax” entirely. No one really knows what’s ahead. But clients with estates in the $7 million range are starting to ponder whether they should start taking steps to avoid the tax.
One idea: Give it away. Sounds easy. But there are rules.
The exemption for 2023 is $12.92 million per person. That’s for both gift and estate tax—the tax schemes are “unified.” So, if you die in 2023, that’s the amount you could give away at your death AND during lifetime. The exemption you get is the one that is in effect in the year of death. But during this period of high exemptions, you can give away more than the future reduced amount and those gifts won’t be subject to the future lower limit. But not-as-large gifts – those under that future amount – don’t get special treatment.
Let’s say Pat has an estate valued at $10 million and gives $3 million in lifetime gifts to reduce the estate to $7 million. If Pat dies in 2026 and the adjusted exemption is indeed $7 million, Pat’s remaining exclusion would be $4 million. The gift made in 2023 did not end up exceeding the future reduction, Pat gets no extra to give away.
BUT if the amount Pat gave away exceeded the future lower limit, the excess gift would escape tax. Say Pat instead made gifts of $9 million prior to 2026 and the at death the exemption was $7 million. Then Pat’s extra $2 million in gifting is not taxed. But Pat does not get additional exemption, unless Pat lives long enough that the annual inflation adjustments kick the exemption up over the $9 million already gifted.
What to Do Before 2026?
So, what can you do if you have more than $7 million and don’t want to give it all away? Lots of things, and here are a few that are really easy.
1) Spend some money. Consider treating yourself. Then, think about others, but be careful. You can’t just just toss money at friends and family without estate/gift tax consequences. Only certain spending on other people doesn’t count. You can pay education and medical expenses, but you need to pay directly to the institution or medical facility. To pay for education indirectly, you can contribute to educational 529 plans, subject to annual exclusion limits (see below).
2) Give to charity. No gifts to qualified charities are taxed. They’re donations.
3) Get married. Spouses can receive unlimited gifts so long as both are U.S. citizens. Plus, with some planning, married couples get to double the exemption. For 2023, this would mean that a married couple has a combined exemption of $25.84 million. In 2026, that’s probably $14 million.
A Commonly Misunderstood Option
4) Take advantage of the annual exclusion. The IRS lets us all give a certain amount each year. It’s called the gift tax exclusion. If you exceed the exclusion limit per person, you start to chip away at your exemption. (And you are supposed to file a gift tax return-Form 709–to inform the IRS.) The 2023 gift tax freebie limit is $17,000. You can give $17,000 to as many people as you wish and owe no tax and preserve all of your entire estate exemption. And spouses each get $17,000, giving a married couples $34,000 per person to give away.
Remember, though, that all gifts count, including ones that are not cash. Did you give your son your old car? If its value exceeds $17,000 (or $34,000 if you are married), you’ve used up a little bit of your estate tax exemption and should report it. Plus, a special rule for 529s allows you to contribute five years of gifts at once.
Easy Is Not Always Best
There are of course more elaborate planning techniques. Certain types of trusts and entities can reduce the value of your estate for estate tax purposes plus provide income tax benefits and help preserve your estate for future generations. (Rather than risking recipients using it unwisely.)
Even simple gifting should be undertaken with caution. Gifts can have an impact on income tax—both good and bad. It’s a good idea to get a full analysis of your entire tax picture. And really if your estate might be subject to estate tax, you can afford to assistance from financial, tax, and estate planning professionals to explain various strategies and weigh your options. Just keep in mind: Proper planning takes time. And 2026 is not that far away.