Growing up I lived down the road from a farmer who liked to say, “I lost money yesterday. The price of hogs went up and I didn’t own any!”
It’s one thing to have regrets over a failure to act when an outcome was unknown at the time. It’s quite another, and inexcusable, to suffer loss from predictable consequences.
Case in point: the Tax Cuts and Jobs Act of 2017 (TCJA) told all high-net-worth taxpayers they had eight years during which they could double their estate and gift tax savings using an increased lifetime exemption before a “sunset” measure in the bill would reduce it by 50% on January 1, 2026.
Well, the time to act draws nigh and there are some recurring questions. The current exemption is $12,920,000 per taxpayer and it increases each year for inflation. But for simplicity’s sake, assume the current exemption is $12,000,000 which will drop to $6,000,000 on 1/1/2026.
Does the taxpayer have to die to benefit from the exemption?
No. The exemption protects property from the Federal Estate and Gift Tax, which means that the transfer tax does not apply to the first $12,000,000 given away, whether at death or during life.
How much of the exemption must a taxpayer use before 1/1/2026 to really benefit?
Using the assumed numbers, at least $6,000,000 must be gifted to take advantage of the high exemption. If $12,000,000 is transferred now, there is no “claw-back,” or retroactive tax due when the exemption is lowered to $6,000,000. But if only $6,000,000 is gifted now and the exemption is lowered to $6,000,000 on 1/1/2026, the taxpayer will be deemed to have used their full exemption and lost the benefit of the temporary excess.
How significant are the possible tax savings from current use of the high exemption?
If a taxpayer takes advantage of the full exemption and moves the additional $6,000,000 from their estate (i.e., $12,000,000 total in gifts prior to 1/1/2026) and assumes there would have been 5% appreciation on the property if left in the estate, the tax savings in 20 years (under current law) for the reduced estate will be more than $6,000,000. Savings will double for married couples who currently use both high exemptions.
What if a “lower-end high-net-worth” married couple can’t practically gift both exemption amounts?
Then be sure to fully use one spouse’s exemption so that the current excess amount is taken advantage of now and not lost later (see Question #2, above).
What are the best assets to give away now?
The biggest tax advantage when receiving inherited property is that the recipient receives a “stepped-up basis” in the inherited asset equal to its fair-market-value at the time – in most cases – of decedent’s passing (e.g., the decedent purchased stock for $10 that was worth $100 when bequeathed to the heir; the heir’s basis in the stock is $100).
But when property is gifted, the donor’s income tax basis is transferred to the recipient (e.g., in the case of the stock worth $100, the donee would have a $10 basis, the same as the donor). So, the best assets to give – at least regarding eventual income tax consequences – are those whose fair-market-value is closest to the donor’s basis. Notwithstanding, the eventual estate tax savings could still outweigh results from the transferred basis issue when gifting appreciated property.
What is a good general demographic of those who can benefit from use of the current high exemptions?
Since the eventual taxable estate will approximate a taxpayer’s net worth, single persons with a net worth of at least $6,500,000 and married couples with a joint net worth of at least $13,000,000, should consider the advantages of using the current high exemptions?
My farmer-friend never did buy any hogs, so that story ends there. But if you have questions or casework on your clients’ planning matters, I’m always ready to with you, and your client, and their advisors, let me know at 706-614-3796 or tom@cpsadvancedmarkets.com.
