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"Estate Tax Exemption Increases, but for How Long?" by Julie Jason

Originally published: Nov. 11, 2022 (distributed by Andrews McMeel Syndication)

The threshold for federal estate taxes is increasing for 2023. As a reminder, the IRS states that an estate tax is "a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death" (tinyurl.com/emrfa5jv). 

     According to the IRS, the estates of those who die in 2023 will have a basic exclusion amount (BEA) of $12.92 million (also known as the filing threshold). That means those estates whose value is below $12.92 million are free from estate taxes. The BEA is up from $12.06 million for deaths occurring in calendar year 2022. 

     To see what we might expect in the future, we need to go back in history for a moment, to the Tax Cuts and Jobs Act (TCJA) of 2017.

     TCJA increased the exemption amount in tax year 2018 from $5.49 million to $11.18 million. Each year since, this amount has been increasing with inflation, but the exemption amounts won't extend past 2025. 

     "[I]n 2026, the BEA is due to revert to its pre-2018 level of $5 million, as adjusted for inflation," quoting the IRS Estate and Gift Tax FAQs (tinyurl.com/yc4ahmva). The inflation-adjusted exemption for 2026 would be around $7 million. That's a far cry from the close to $13 million exemption going into effect in 2023. 

     Unless new legislation is passed to continue the TCJA adjustments, more taxpayers will need to rethink their estate tax planning. 

     There may be opportunities to take advantage of today's higher exclusion amounts through gifting (usually to family members or causes). That means giving away money permanently to reduce your estate -- something only the high-net-worth would consider doing. 

     In case you're giving that some thought, one issue is whether you would lose the benefit of current exclusion amounts if the threshold decreases after 2025. 

     According to the Estate and Gift Tax FAQs: "[P]eople planning to make large gifts between 2018 and 2025 can do so without being concerned that they will lose the tax benefit of the higher exclusion level once it decreases." Final regulations were released by the IRS on Nov. 26, 2019 (tinyurl.com/yrccwacp).

     I asked lawyer David Lehn, a partner in the private client and tax team of Withersworldwide, to share his experiences with gifting under these circumstances: 

     "Once the gifts are made, all future appreciation/income on the gifts also avoids estate tax. With the power of compounding and assuming there are several years between the gift and the individual's death, this can provide an enormous estate tax savings. Further, if the gift is made to a trust, it is possible that the individual may continue to pay future income tax concerning income/capital gains generated by the gifted items. This further 'super charges' the gifts made by potentially greatly reducing an individual's estate tax. It is a combination that anyone with significant wealth should seriously consider." 

     There are three important points I'd like you to come away with.

     First, the good news is that fewer estates will be subject to federal estate taxes. For deaths in 2023, estates below roughly $13 million will pass to heirs free of federal estate taxes. 

     Second, if you are wealthy and have the capacity to make irrevocable gifts to lower your potential estate tax liability, it's worth your time to call your estate attorney. 

     Third, since family situations and laws are in flux, I recommend periodic consultations with your trusts and estates attorneys. If the financial "adviser" you work with specializes in the more complex high-net-worth family situations, be sure to include him or her in your review as well. 

To read Julie Jason's books, go to: https://juliejason.com/author/julies-books.