Florida Elder Law & Estate Planning Blog

Estate/Gift Tax A Moving Target, But No Clawback Is Certain

Effective January 1, 2020, the federal lifetime unified estate and gift tax exemption increases. Individuals who pass away in 2020 can pass, tax-free, $11.58 million (was $11.4 million). With portability, a married couple may pass twice that amount, $23.16 million. Anything in excess of that amount is taxed at 40%.

According to the nonprofit Tax Policy Center, in the year 2018, when the exemption level was even lower, at $11.4 million, only 1,900 estates were taxable. Clearly the vast majority of taxpayers have no reason to be concerned about estate tax while the rate is at its current level. High net worth individuals on the other hand are well advised to make sure their estate plan is structured to take advantage of the full lifetime exemption. Good planning can ensure that loved ones receive as much tax-free money as possible.

Annual Exclusion Unchanged in 2020

Gift giving is one strategy that allows a person to reduce the value of his/her taxable estate and put the maximum amount of tax-free money into loved ones’ hands. The annual exclusion in 2020 is $15,000, unchanged from the prior year. This means that an individual may give away $15,000 each year to as many individuals as desired (a married couple may double that amount) without reducing the lifetime exemption. More than that amount may be given away without impacting the lifetime exemption if the gift goes directly to a medical provider to pay for someone’s health care, or to an educational institution.

With regard to capitally appreciated assets, if they are gifted during the owner’s lifetime rather than passed at death, there is no step-up in basis. If and when the recipient sells the asset, he/she will owe capital gains taxes based on the asset’s original purchase price. This must be carefully weighed against the estate tax benefits when gifting capitally appreciated assets.

Sunset Of Current Law

Complicating planning is the fact that the current estate tax law sunsets on January 1, 2026. On that date the exemption threshold will decrease, reverting to levels in effect before the passage of the 2017 Tax Act: $5.6 million per individual, $11.2 million for a married couple (plus the annual inflation rate). The lower exemption will catch more individuals in the estate tax net. Many more taxpayers will need to do appropriate planning.

No Clawback

Since passage of the 2017 Tax Act, high net worth individuls and estate planning attorneys have been concerned about the sunset provision: If a decedent passes away in 2026 or later and has made large gifts based on the pre-2026 higher exemption levels, what happens to estate tax liability? Will the gifts be “clawed back” into the estate? On November 22, 2019 the IRS issued regulations that settle the matter: Gifts made when the exemption was higher will NOT be clawed back and will remain sheltered from estate tax.

State Taxes Still an Issue for Some

Florida does not have an estate tax, but 13 states do. It is important for residents of those states, and individuals considering locating to those states, to consider state estate tax when creating their estate plan. States that currently impose an estate tax are Connecticut, District of Columbia, Hawaii, Illinois, Maine, Massachusetts, Maryland, New York, Oregon, Minnesota, Rhode Island, Vermont and Washington State.

What’s Ahead

Estate tax law has been a political football for decades. It still is. Nothing is settled “permanently.” Regardless of which political party takes control of Washington next year, it will have to deal with a deficit at an all-time high. The estate tax may again figure prominently in the debate. To determine the best course of action, contact our office.