While we are all experiencing the uneasiness of having so many plans up in the air, from family vacations to returning to the office, Lane Powell’s Private Client Services Team would like to remind you of some important planning that you can accomplish right now to utilize the historically high federal gift and generation-skipping transfer tax exclusion amount.
The Current Tax Setting
The Tax Cuts and Jobs Act (the “TCJ Act”) became effective January 1, 2018.
- The TCJ Act increased the per person estate and gift tax exclusion amount to $11.58 million per person (as of 2020 based on annual inflation adjustments).
- The generation-skipping transfer (GST) tax exemption amount was also increased to the current $11.58 million per person for a lifetime or testamentary GST transfers, also adjusted annually for inflation.
- The annual tax-free gift amount is currently $15,000 per recipient.
Absent further Congressional action, the exemption amounts will revert to $5 million per person, indexed for inflation, on January 1, 2026. However, in light of the unprecedented federal spending to address COVID-19, depending on the upcoming election and actions by Congress, it is possible that these exemption amounts could be reduced by legislative action prior to 2026.
Exemption Use Strategy
If a taxpayer uses the higher exclusion amount prior to any changes in the law, then the IRS will respect the use of the exclusion amount. Under current law, if the exemption amount is reduced by Congress, any unused exemption amounts will be lost. Given that neither Washington nor Oregon has a gift tax, gifting provides a significant planning opportunity for Washington and Oregon residents to transfer assets during their lifetimes.
Exemption Use Options
Taxpayers have several options for using their gift exemption.
- General Gifts of Assets. Considerations include whether the gift would be outright or in trust, the tax basis of the gifted asset, and whether the asset might be subject to valuation discounts that would leverage the exemption amount.
- Loan Forgiveness. Forgiveness of an existing loan to a loan recipient. Considerations include the likelihood of repayment. An appraisal of the promissory note will be required.
- Gift of Interests in Family Partnerships or LLCs. Considerations include whether the gift might reduce the risk of inclusion of the asset in the taxpayer’s estate due to control over the gifted entity.
- Spousal Gifting. Outright gifts to a spouse or gifts to a spousal lifetime access trust (SLAT). A SLAT is an irrevocable trust created by one spouse for the benefit of the other during their lifetime. Considerations are that SLATs are not creatures of the Internal Revenue Code, and require significant advance planning and analysis to properly implement and operate.
- Gifts to Grandchildren. Gifts can be structured to use both gift and GST exemption, through outright gifts to grandchildren, gifts in trust for the benefit of grandchildren, or gifts in trust for the benefit of children that will ultimately pass to grandchildren.
Gift Planning Requirements
Appraisals will be required for all assets except cash and publicly traded securities. Gift tax returns must be filed to report all gifts that exceed the annual exclusion of $15,000 per recipient.
Every taxpayer’s situation is different and there is no one-size-fits-all approach to estate and gift planning. We are happy to consult with clients to determine what strategy might work best for their specific objectives, family, and financial situation.