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Understanding the Temporary Doubling of Gift & Estate Tax Exemptions.


Introduction: The Tax Cuts and Jobs Act (TCJA), signed into law in 2017, brought significant changes to the U.S. tax landscape. One of the notable provisions was the temporary doubling of federal estate, gift, and generation-skipping transfer tax exemptions. This move provided taxpayers with unique opportunities for tax planning. However, it's essential to be aware that these benefits are set to expire on January 1, 2026. In this blog post, we will delve into the temporarily doubled gift and estate tax exemption, exploring strategies to maximize its advantages before sunset.

Understanding TCJA's Impact: To begin, the TCJA doubled the estate tax exemption to $10,000,000 per person or $20,000,000 for married couples. Adjusted for inflation, these amounts in 2024 are $13,610,000 for single individuals and $27,220,000 for married couples. Unfortunately, come January 1, 2026, these figures are slated to revert to $5,000,000 per person or $10,000,000 for married couples, adjusted for inflation.

Navigating the Sunset: This reduction prompts questions about gifts made between 2018 and 2025, the period of the temporary doubling of exemptions. Concerns arise regarding potential clawbacks and taxes on gifts exceeding pre-2018 levels. Fortunately, the IRS has clarified that excess gifts made during this period generally won't be clawed back into the estate. However, exceptions exist, such as gifts with retained interests, emphasizing the importance of collaboration with tax advisers.

Strategic Gift Planning: It's crucial to note that gifts during 2018-2025 do not utilize the bonus TCJA exemption first; instead, they follow a bottom-up calculation, using up the pre-2018 Exemption Amount initially. This makes the bonus exemption a "use it or lose it" proposition. Advisers should proactively engage high-net-worth clients in discussions about making substantial gifts before 2026.

Illustrative Example: Consider a scenario where a client makes a $13 million gift this year. Concerns may arise about potential reversion to a lower exemption in 2026. However, in most cases, the entire $13 million would remain outside the estate. This exemplifies the importance of seizing the opportunity presented by the temporary exemption increase.

Additional Planning Considerations: Apart from making larger gifts before the sunset, advisers should consider other planning aspects. Families currently below the exemption may no longer fall under it when TCJA expires, necessitating early estate planning discussions. As assets and wealth grow over time, even clients currently below the lifetime exemption need to anticipate potential future changes.

Collaboration with Advisers: Lastly, collaboration with other advisers is essential to ensure clients have the right trust structures in place for effective estate planning. Life insurance, particularly in an Irrevocable Life Insurance Trust (ILIT), can be a valuable tool for creating liquidity at death and preserving estate values.

Conclusion: The temporary doubling of gift and estate tax exemptions under TCJA offers a time-limited opportunity for strategic tax planning. Advisers should actively engage with clients to explore optimal gift strategies, considering the impending sunset in 2026. By understanding the nuances and collaborating with tax and financial experts, individuals can maximize the benefits and secure their financial legacies.

The Tax Cuts and Jobs Act (TCJA) is scheduled to sunset on 1-1-2026
The Tax Cuts and Jobs Act (TCJA) is scheduled to sunset on 1-1-2026