Rising inflation has been headline news over the past several months. While reasonable minds may debate the causes of the recent uptick in prices or whether this is “transitory” or longer lasting, one positive outcome has been an increase in the amounts that may be gifted to family members and friends without gift or estate taxes. The new annual gift tax exclusion amount is $16,000 per recipient (from a single donor), up from $15,000 in 2021. The lifetime gift and estate tax exclusion amount has climbed to a record $12.06 million per person.
Here’s how the exclusions work: A client could give each of their children $16,000 in 2022, without having to pay a gift tax or having it chip away at their lifetime exemption. To further boost the gift, their wife could join in, so the couple could jointly give $32,000 to each child. If they wanted to include their daughters-in-law, they could do that as well, to the tune of $32,000 each. If this couple had two sons, each of whom had a spouse, they could give away a total of $128,000, as a strategy to reduce their estates, all without paying gift taxes. A bonus: If they give assets that are likely to appreciate, the couple in question is removing appreciation from their estates as well.
One caution: For lifetime gifts, the recipient of the gift receives the donor’s tax basis. For that reason, it is not a great idea to gift already-appreciated assets since the recipient will have an embedded capital gain. It is better to save those appreciated stocks and mutual funds for your favorite charity. Generally, a taxpayer may deduct the fair market value of the asset on the date gifted and the charity is able to sell without paying a capital gains tax. The rule is different for assets gifted at death. In such cases, there is a “step up” in cost basis to the value of the asset on the donor’s date of death, erasing any capital gain.
Gifts that go above and beyond the $16,000 per person, per year amount (or direct payments for tuition or medical expenses) reduce a donor’s lifetime exemption amount. Gifts that do not qualify for any other kind of exemption count against the $12.06 million lifetime amount. It is a cumulative figure and accounted for on a gift tax return. Whatever is not used during a person’s life is available for use after their death on the estate tax return. The $12 million+ amount is the largest in the history of the tax and allows for significant wealth transfers. For a married couple that has made no prior taxable gifts, the total that may be gifted is $24.12 million!
The hitch is that the current, higher amount is scheduled to expire on Dec. 31, 2025 and return to $5 million (adjusted for inflation) per individual. This was part of the reconciliation that was used to enact the Tax Cuts and Jobs Act which was signed into law at the end of 2017. Admittedly, every household won’t have to worry about the amount decreasing from a combined $24.12 million per couple to less than half that amount, but for those families interested in significant wealth transfers, planning should start sooner rather than later.
Knowledgeable estate planning attorneys and accountants work with a family’s financial advisors to determine the most effective techniques and assets to employ in a significant gifting strategy. Importantly, this should not be approached as a DIY project; errors when dealing with sums this large can be costly. It’s always best to seek advice from qualified experts. Families who have the assets to undertake a sophisticated gifting plan may never see such a ripe opportunity again to move assets down to future generations.