Another year, another increase in the federal unified estate and gift tax exemption levels, but how does this impact you and your family? The increase in the exemption level gives you and your loved ones the ability to gift more money, reduces the amount of federal estate tax burden on your children, and enables you to shift your more of wealth so that it can grow tax-free in trust for your descendants.
The Internal Revenue Service (“IRS”) has officially announced the new 2020 unified estate and gift tax limits. These amounts are indexed for inflation and updated each year.
The IRS outlined the new inflation-adjusted numbers in Rev. Proc. 2019–44. An individual can now transfer—by gifting or upon his or her death—up to $11.58 million without being subject to the 40% federal estate and gift tax rate; this amount was previously $11.4 million in 2019 and $5.6 million in 2018. A married couple now has the ability to protect up to $23.16 million from federal estate or gift tax.
Federal Unified Estate & Gift Tax Lifetime Exemption
| Tax Filing Status |
2019 | 2020 |
|---|---|---|
| Single | $11.4 million | $11.58 million |
| Married | $22.8 million | $23.16 million |
Below are several additional issues to be mindful of for your estate planning:
Warning for Married Couples
The $23.16 million exemption for married couples is not applied automatically after the death of the first spouse. Although the unlimited marital deduction allows you to leave all or part of your estate to your surviving spouse tax-free, one must elect to use said late spouse’s exemption—known as “portability”—by filing a federal estate tax return (Form 706) even when no taxes are due.
Annual Exclusion Remains $15,000 per person
Additionally, the annual exclusion for gifting—the amount that can be given per person without counting against your lifetime exemption—remains at $15,000 for the year 2020. For any gifts that exceed $15,000 per individual, you will need to file a Gift Tax return even though no taxes will be due, unless you exceed the unified estate and gift tax exemption ($11.58 million in 2020). The gift tax will likely only be used to document the use of part of your large unified credit.
Future Changes on the Horizon and How to Anticipate and Plan for It
With the upcoming 2020 elections, it is critical to undertake active discussions about your gifting and estate planning goals because the current exemption levels will eventually expire on January 1, 2026; it may even expire sooner because several presidential candidates have discussed reducing the exemption level to its 2009 numbers ($3.5 million) with the 40% flat-rate being converted into a graduated tax rate going as high as 77%.
Additionally, the IRS has previously announced that it will not “claw back” the lifetime gifts if or when the exemption is lowered. Therefore, it is very important for you to consider using your exemption ($11.58 million in 2020) while you have it. If you do not use it and the government changes the laws, you will effectively lose millions of dollars of exemptions which could translate into millions of dollars of additional federal estate tax for your children and family.
This presents additional planning opportunities, including advance estate planning techniques that can be used to “lock-in” these exemption amounts while they remain high. Spousal Lifetime Asset Trust (“SLATs”), Charitable Lead Annuity Trusts (“CLATs”), Family Limited Partnerships, Grantor-Retained Annuity Trusts (“GRATs”) and other advanced estate planning techniques are just some of the tools that can be used to lock-in the high exemption amounts.
It’s important to not delay investigating whether these advanced estate planning techniques are a good fit for you. The attorneys at UTBF are happy to discuss your unique circumstances and how you can lock in the current estate and gift tax exemptions before it gets reduced, either in 2026 or sooner.
Contact David Frees and Douglas Kaune today at (610) 933–8069 for information regarding your estate planning and how you can ensure you don’t lose your digital assets forever in the digital “cloud.”
David Frees represents thousands of clients in Chester County, Montgomery County, Delaware County, Philadelphia County and Lancaster County and many clients from communities such as, Wayne, Berwyn, Devon, Paoli, Exton, Phoenixville, West Chester, Malvern, Chester Springs, Ardmore, Villanova, Rosemont, Newtown Square, Gladwyne, and surrounding areas.
