The Use It or Lose It Tax Exemption

The Use It or Lose It Tax Exemption

Courtesy of the Tax Cuts and Jobs Act, the gift and estate tax exemption has nearly doubled to $11.18 million per person for 2018.

This new amount will continue to increase through 2025, indexed to inflation, but will drop back to pre-2018 levels in 2026, or around $6.56 million per person.

There is some concern with the change set for 2026 that there could be some sort of clawback when the exemption is reduced. However, the Treasury and the IRS both issued proposals regulations in November stating that individuals who take advantage of the increased exemption through 2025 won’t suffer any negative impact when the exemption drops in 2026. Although yet to be adopted, the proposal suggests that a clawback in unlikely to be an issue.

The major point to keep in mind is that the exemption is temporary and wealthy families need to use it or lose it. Not only can individuals transfer twice the tax-free amount through 2025, the appreciation on those gifts will also be free of gift, estate and GST tax forever if a dynasty trust is employed.

Keep in mind that individuals taking advantage of the exemption must file a Form 709, United States Gift Tax Return. For assets other than cash or securities, a professional appraisal may be required. Individuals making small gifts of up to $15,000 annually can make the gifts to an unlimited number of people without tax consequences.

For ultra-wealthy clients, there are a number of estate -lanning strategies, including grantor-retained annuity trusts and sales to intentionally defective grantor trusts and charitable lead annuity trusts, that can allow clients to make significant gifts to future generations while using only a small portion of the exemption amount.

The important thing to remember is that clients shouldn’t put off taking advantage of the increased exemption.  There’s always a chance that the laws could change following the 2020 election, and this exemption is too good to go to waste.

For more information, please read:
The “Use It or Lose It” Increased Gift and Estate Tax Exemption | Wealth Management


Buyers Remorse: Was Universal Life a Big Mistake? Study Defines Skill Set of the Top Advisors