Record-High Exemptions for Tax-Free Gifting Set to Expire Soon

At a glance

• The main takeaway: The lifetime exemption amount for tax-free gifting is at an all-time high, but it’s only temporary. Exemption amounts could be slashed in half starting January 2026.
• Impact to taxpayers: With proper planning and swift action, taxpayers could “lock in” the higher exemption amounts with no concern about being taxed on those gifts in the future.
• Next steps: Schedule a consultation with Aprio’s trust and estate team who can review and revise your estate plan to take full advantage of the record-high lifetime exemption amounts.

The full story:

When the Tax Cuts and Jobs Act (TCJA) went into effect on January 1, 2018, it temporarily doubled the exemptions for combined gift and estate taxes with a sunset date of December 31, 2025. As we near the expiration date, it is important for taxpayers to reassess their estate planning strategy to ensure they’re taking full advantage of these temporary advantages.

Understanding Current Laws

Estate and gift tax go hand-in-hand as they are subject to the same federal tax rate and generally share the federal lifetime exemption amount. The lifetime exemption amount  allows taxpayers to make tax-free gifts, either while alive or to an heir at death, as long as the total sum transferred across the taxpayer’s lifetime does not exceed the established federal cap. In 2023, the federal lifetime cap for most individuals is $12.92 million while the cap for most married couples in 2023 is $25.84 million.

However, the lifetime exemption amount does not include all annual monetary gifts. Taxpayers can take advantage of an annual exclusion amount that can be maximized before starting to use the allotted lifetime exemption amount. In 2023, individuals can gift up to $17,000 per recipient and married couples can gift up to $34,000 tax-free without reducing their remaining available lifetime exemption amount.

It can help to understand the difference between the lifetime exemption and annual exclusion amounts by using a simplified example. Say you gave your child $27,000 in cash during 2023. The current annual exemption amount means that $17,000 of that total is not taxable, and your lifetime gift and estate tax exemption is only reduced by the remaining $10,000, leaving you with $12,910,000 to gift or leave in your estate before being subject to federal taxation.

Prepare for upcoming changes

Unfortunately, this advantageous period is only temporary, as the amounts are set to revert to the pre-TCJA levels, adjusted for inflation, starting January 1, 2026, essentially cutting the exemption in half. However, the political outcomes of 2024 could have a significant impact on this upcoming change. While the exemption amounts are at a record high right now, they could drop even lower than the pre-TCJA amounts in the future. Therefore, implementing a planning strategy now to take advantage of the increased exemption before the deadline is crucial.

Maximize planning opportunities

Aprio discussed some of the potential estate tax planning opportunities in a previous article just after the TCJA went into effect. It’s more important now than ever to work with a tax advisor to assess the opportunities available to you. The right tax advisor will assess your individual assets and needs to create a personalized plan, as there is no one-size-fits-all solution. Nonetheless, these are a few of the strategies that may help you fully maximize the higher exemption amount while it’s still available:

1. Gift assets now.

Those who plan to gift more than $5 million in their lifetime or after death should consider making those gifts before 2026. The IRS confirmed on November 26, 2019, that there will be no “claw back” for gifts made prior to January 1, 2026, meaning nontaxable gifts made under the current exemption will not be subject to taxes in the future.

2. Help loved ones with qualified medical bills and education expenses.

Decrease your taxable estate without dipping into the lifetime gift tax exemption by making payments on loved ones’ medical bills and tuition expenses. There is no limit on payments made directly to the providers.

3. Donate to charity.

The TCJA also temporarily increased the adjusted gross income (AGI) limit for charitable cash contributions made to public charities to 60% of AGI when taking the itemized deduction, making this another meaningful way to decrease your taxable estate outside of the lifetime exemption. If you are considering charitable donations, there are several tax planning techniques that should be discussed with a tax advisor, such as setting up a charitable lead trust or transferring qualified charitable distributions.

4. Convert to a Roth IRA.

Roth IRA conversions take advantage of the current income tax rates before they increase, reducing the estate and making future withdrawals tax-free. This is a helpful strategy for transferring retirement assets with a minimal tax burden, as Roth IRAs are not subject to required minimum distributions and do not go through probate.

5. Consider setting up trusts.

Trusts also don’t go through the probate process, often saving heirs time and money. Additionally, trusts that can be structured as grantor trusts are especially beneficial as this structure allows the grantor to retain limited control of the assets and report the trust income on their own personal income tax return, thus avoiding the trust rates for income and capital gains tax. However, what specifically makes grantor trusts an attractive planning strategy is the fact that the grantor pays all of the income tax, which allows the trust assets to grow for the benefit of the beneficiaries.  This is essentially a tax-free gift.

There are several types of trusts which can be set up as grantor or non-grantor, depending on your individual needs. Consider discussing some of the following examples with your tax advisor:

• Spousal Lifetime Access Trust – removes property and future appreciation from an estate while still indirectly benefiting the donor spouse.
• Dynasty Trust – passes wealth through generations without being affected by transfer taxes.
• Irrevocable Life Insurance Trust – removes the proceeds from the death benefit of a life insurance policy from the gross estate.

The bottom line

Time is running out to take advantage of the temporarily increased lifetime exemption amount for estate and gift taxes, so you need to start planning now. Schedule a consultation with the Aprio trust and estate team today to review your options and build a plan that is best for you and your loved ones.

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