In 2012, the American Taxpayer Relief Act (ATRA) established, for the first time, a permanent estate tax and gift tax exemption. The exemption is the amount an individual can pass on at death without paying estate taxes. The legislation set the exemption at $5 million per person, indexed for inflation.
Five years later, Congress decided the exemption was not large enough and passed the Tax Cuts and Jobs Act of 2017 (TCJA), which increased the lifetime exemption amount to $11,180,000 per person. As with the previous legislation, the new exemption was indexed for inflation.
Coming up in 2023, the new exemption amount will take a substantial jump to $12,920,000 per person or $25,840,000 per couple, up from the $12,060,000 and $24,120,000 respectively that were allowed in 2022.
The new, higher exemption amount may provide additional planning opportunities for individuals and families to transfer more wealth and shelter more assets from estate taxes. That’s good news, especially because the higher exemption created by the Tax Cuts and Jobs Act is scheduled to sunset in 2025. If Congress does nothing, beginning January 1, 2023, the estate tax exemption amount will revert back to the American Taxpayer Relief Act amount of $5 million, which, indexed for inflation is expected to be in the mid to high $6 million range.
Besides the sunsetting of the current law, the Biden Administration has floated the idea of lowering the estate tax exemption to $3.5 million, imposing capital gains on appreciated assets transferred during life and at death, and taxing capital gains at ordinary income tax rates up to 39.4% rather than the current capital gains rate of 23.8%.
While none of these proposals have become law, now is a good time to review your estate plan or create one. Waiting until any new legislation is passed could run into time issues. The estate planning process can take several months and involve many components such as the development of goals and objectives, execution of legal documents, changing ownership of assets, and asset appraisals. Implementation now can help prevent the stress of last-minute decisions and increased costs.
Gift planning that includes privately held business interests will require a valuation of the entity for gift tax purposes as well as computing discounts for lack of control and marketability. The use of qualified valuation professionals will ensure that the valuation used for gift tax purposes is respected by the IRS and not subject to a future challenge.
Will the government make the changes? Who knows. But it’s a reminder that creating an estate plan or updating an existing one can save you headaches, heartache, and money in the future.
This article is presented as information only and should not be considered financial, tax, or legal advice.