Today There’s a $25.84 Million Lifetime Gift Tax Exclusion — Your Clients Can Use It or Lose It
In June, 2019, Windsor's Marty Flaxman wrote one of our most popular blogs, "Today There's a $22 Million Lifetime Gift Tax Exclusion - Your Clients Can Use It or Lose It."
We asked Marty to revisit this post as we approach 2023, with only a few years left for you and your clients to take advantage of this singular opportunity. The numbers have changed, mostly favorably.
But more important, time is running out.
A successful sale typically has three common elements: It solves an important problem. The solution itself is time-limited, meaning that if you don't take action soon, all will be lost. And it's a story that you can honestly get passionate about because it's so important to the client.
Five years ago, the Tax Cuts and Jobs Act (TCJA) of 2017 created that exact scenario. Beginning in 2018 and lasting through 2025, the U.S. dramatically increased the amount of money/assets that individuals can gift to non-charitable entities without being subject to federal gift taxes. Any client who had maximized their gift-tax exempt transfers in 2017 woke up in 2018 with an additional $5,490,000 ($10,980,000 for married couples) that could be transferred out of their estate without gift tax ramifications. And even better, that amount was indexed for inflation so that every year thereafter they could transfer that indexed increase as well.
For 2023, the inflation-adjusted lifetime gift tax exemption is $12,920,000 per individual, or $25,840,000 for married couples.
In less technical jargon, use it or lose it because, if you woke up in 2026 and had not used this historically unparalleled governmental largesse, your lifetime gift-tax-exempt transfer limits would now revert back to the original 2017 level, indexed for inflation. The chart demonstrates both the opportunity for action and the potential cost of waiting too long.
As with all new legislation, there were questions that needed to be resolved and the TCJA was no different. The law left open the possibility that a gift that previously took advantage of the increased exemption amount would be subject to estate tax upon the donor's death, or "clawed back" into the taxable estate. This would occur if the estate tax exemption applicable at the donor's death were lower than the exemption amount at the time of the gift.
The IRS has proposed new regulations to address this issue. If an individual made a gift taking advantage of the increased exemption amount between January 1, 2018 and December 31, 2025, the exemption amount used in calculating the federal tax payable on the aggregate of the individual's lifetime gifts and taxable estate would be the greater of (i) the exemption amount at the time of the individual's death or (ii) the portion of the increased exemption amount previously applied to lifetime gifts. There are some exceptions to this rule, which you can examine in more detail here.
Clients have an abundance of estate planning tools that are available to minimize wealth transfer taxes, but they all begin with taking advantage of the TCJA's eight year window that will close automatically after 2025, and that can be closed by new legislation at any time with little to no warning. Some key questions you might ask that can guide your client into exploring their options include:
"Assuming you made gift tax exempt transfers to an irrevocable trust, how important is it that you or your spouse retain access to some of the income generated by that trust?" You can accomplish that with a spousal lifetime access trust (SLAT).
"Assuming you made gift-tax-exempt transfers to an irrevocable trust, and you could personally pay the trust's income taxes without having it counted as an additional gift, would that be attractive?" The solution is an irrevocable trust that is defective for income tax purposes (IDIT).
"Assuming you could supplement the money gifted to the trust with loans at below market rates with the loan interest not taxable to you, would that be attractive?" That's called a gift and loan to an IDIT.
And lastly, "how important is it that some of the assets in the trust have guaranteed future returns at competitive interest rates?"
In the current economic environment, asset valuations are down for many clients, creating an opportunity to consider transferring assets that will have substantial future upside potential. And from a product solution perspective, if clients are unwilling or unable to pay full premiums for permanent coverage, options include premium financing or convertible term insurance, until some of the transferred trust assets hit the market and provide adequate funding through favorable returns.
January 1, 2026 is just over 36 months away. For clients who want to take advantage of this vanishing opportunity, there is no "one size fits all" estate planning solution. There simply aren't enough qualified estate planning law firms available to develop and implement a satisfactory plan within a rapidly closing window of time.
Now is the time to take action.
Our conclusions in 2019 hold true today, as the clock ticks down:
Doing nothing can ultimately cost clients 40¢ on every $1 that is not transferred and removed from the taxable estate.
Doing nothing keeps the next 20, 30, 40 years of appreciation on the assets retained in the estate, costing heirs even more.
So let the conversation with your client begin.
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