2020 Estate Planning and Federal Estate and Gift Tax Update

gift tax

(January 24, 2020) We periodically send out updates on estate planning, and as we learn about tax decisions and the tax ramifications going forward. As the year gets underway, we wanted to notify our friends and clients of certain tax changes so that you can plan accordingly.

TAX UPDATE 2020 Federal Estate Tax Update

We have learned that the federal estate/gift tax exemption for 2020 will increase by $180,000.00 to $11,580,000.00 per person, up from the 2019 federal estate/gift tax exemption of $11,400,000.00. Each individual’s available exemption is always reduced or adjusted for prior gifts or transfers. The increased exemption will equate to $23,160,000.00 per married couple. The generation-skipping (GST) tax exemption will also increase by the same amount, to the same figures. These numbers are based on a full exemption, and would need to be adjusted for any prior gifts or taxable transfers. The IRS has also indicated that the exemption amounts will continue to be indexed for inflation on an annual basis going forward. In addition, these exemptions were part of the tax law imposed several years ago, and is scheduled to sunset/expire on December 31, 2025.

There is also the “annual exclusion” that each individual has that they can give away to each person per year without using any gift tax exemption. Like the federal estate/gift tax exemption, the annual exclusion amount is also indexed for inflation on an annual basis, and for 2020, this amount remains at $15,000.00 per person, per year, or $30,000.00 per person if the donor is married, and a couple elects to “split” the gift.

There is also an annual exclusion for gifts between spouses when one is a non-citizen spouse. For 2020, the special annual exclusion gift to non-citizen spouses will increase from $155,000.00 in 2019, to $157,000.00 in 2020.

In addition, payments of tuition and medical expenses directly to the educational or health care provider do not require use of anyone’s annual exclusion amount or gift tax exemption.

Tax Updates

Clients who have considered making substantial gifts to family members or other individuals have expressed concern that when the 2017 Tax Act expires on December 31, 2025, the IRS might seek to avoid or reduce prior gifts that used the currently high gift tax exemptions. This concern has also been shared by estate planning practitioners and other advisors. On November 22, 2019, the Internal Revenue Service (IRS) issued final regulations regarding gifts made during the currently increased federal estate/gift tax exemptions. The federal regulations issued by the IRS allow decedents’ estates to benefit from a higher exemption amount for gifts made in which the exemption amounts are greater. Thus, gifts made under the currently increased annual federal exemption amounts will not be subject to tax prospectively if the exemption amount is reduced due to the sunsetting provision at the end of 2025. However, if the exemption amount reverts back to $5,000,000.00, subject to adjustment for inflation, and the larger exemption has not been used, taxpayers will be prohibited from trying to utilize what had been a larger exemption. This is also important for couples where one spouse has died, and the estate elected to pass the unused exemption amount, commonly referred to as “portability” to the surviving spouse. The amount of portability transferred to the surviving spouse will not be reduced prospectively.

If you have any questions, or are interested in discussing the issues raised in this communication in greater detail, please contact your counsel at Timoney Knox, or if you do not have a specific lawyer, contact the Trust and Estate Department.