Proper estate planning may be necessary to ensure you take full advantage of the current high exemption amounts and do not negatively impact your legacy when the exemption amount decreases. The federal exemption amount will decrease after December 31, 2025. Until then (unless Congress makes any changes) the exemption amount is $12.06 million for individuals and $24 million for married couples.
While fewer than 1 percent of American households have a net worth over $10 million, and even fewer over $24 million, this may still be an issue if overlooked now since the amount is set to decrease. Those who die in 2026 or later will only be able to exempt a little over $6 million from their estate for tax purposes. Many financial advisors worry that Congress will lower the amount even more in order to attempt to get income to pay for all of the current spending bills.
This means those with smaller estates in the 2-8 million dollar range could be drastically impacted by this decreased exemption if they do not plan ahead and take advantage of the current high exemption amounts. This may be the time to execute on some generous gift giving.
What is the Gift Tax?
In 2022, the annual gift tax exclusion is $16,000. This allows each individual to give $16,000 to as many other individuals they would like and neither the donor nor the gift recipient need to report this gift to the IRS. If someone chooses to give one individual more than this in a single year, he or she will need to file a gift tax return. You most likely will not owe any gift taxes because of the $12 million exemption. The exemption applies to all gifts in your lifetime (above the $16,000 per individual per year).
Why does this matter? If you give money away during your lifetime, you can avoid gift tax by using the $12 million exemption. If you choose to hold on to all of this money and live to 2026, then you may risk losing the ability to avoid paying estate taxes. The exemption amount in effect at that time (and we cannot predict exactly what it will be) determines how much of your taxable estate is exempt from estate taxes.
To illustrate using an example: Carolyn has a current net worth in 2022 of $14 million. She has two responsible, hard-working adult sons with families of their own. Given that she is 78 years old, she determines that $2 million is sufficient for her needs. She gifts her sons $6 million each. When she passes away, her estate will owe a percentage of the remaining $2 million.
Let’s say Carolyn decides she needs all of her money until the day she dies. She keeps all $14 million in her name. She dies on January 2, 2026. Her estate now owes estate taxes on approximately $8 million. The amount of money her sons receive in the end is much, much less than if she had gifted during her lifetime.
Each situation is unique and highly complex. An experienced estate planning attorney can assess all the factors and help make a recommendation on a gifting strategy that would be most advantageous. Set up a consultation with the estate planning attorneys at Stouffer Legal in the Greater Baltimore area. You can schedule an appointment by calling us at (443) 470-3599 or emailing us at office@stoufferlegal.com.
