Stroll Lloyd Harbor - January 2024
The current combined federal estate and gift tax exemption amount of $13.61 million per person ($27.22 million per married couple) is scheduled to “sunset” automatically on January 1, 2026, and revert to $5 million indexed for inflation (guesstimated at $7 million), unless Congress takes action. This exemption amount applies to the total taxable gifts made during an individual’s lifetime and the value of property transferred at death to someone other than a spouse or charity. Once the gifts combined with transfers at death exceed the exemption amount, a federal tax of 40% will be imposed on the excess.
As we know, lately, Congress has had difficulty constructively addressing almost anything. It’s becoming increasingly likely that the federal exemption amount will sunset and be reduced to about $7 million per person. Individuals using the increased exemption amount prior to 2026 can, however, take comfort. The Internal Revenue Service has issued a directive making clear that gifts totaling no more than the higher exemption amount made prior to midnight on December 31, 2025, will not be subject to additional gift and estate taxes after the federal exemption is reduced in 2026.
For example, if Mary made a $13 million gift in 2024 to her daughter, Gwen, (when the exemption amount is $13.61 million) and then dies in 2026 (when the exemption amount decreases to about $7 million) the gifts in excess of the $7 million exemption would not be added to Mary’s total lifetime and death transfers and would not increase the federal estate tax due on her estate.
While many are waiting to see what happens to the exemption amount before January 1, 2026, time is running out. It takes time to complete an effective gift plan including potential recapitalizations, transfers and appraisals, so waiting too long many not give you the time to get the gifting done before the exemption declines. Therefore, those considering making substantial gifts should do so well before the end of 2025.
New York has its own separate estate tax system, with the estate tax exemption for 2024 set at $6.94 million per person. While there is no New York State gift tax, New York adds back to your taxable estate all taxable gifts you made during the three-year period immediately preceding your death. This may also prompt you to make gifts sooner rather than later in order to reduce the value of your estate at death for New York estate tax purposes.
Making large gifts, especially one ‘s interest in a business, is a multi-faceted decision, involving what is best for the business, the owner’s family and the owner. Federal and New York capital gains tax consequences of making gifts must be considered, as the donee receives the gifted assets with your income tax basis. Tax savings, corporate goals and personal comfort must all be considered before making a substantial gift. However, the opportunity to transfer increased amounts to family members at no federal transfer tax cost may run out if you do not act sooner rather than later.
This article appeared in the January 2024 issue of Stroll Lloyd Harbor.
