Families and individuals with significant assets will have new opportunities in 2023 to transfer tax-free wealth to their heirs. Your estate planning attorney can provide you with guidance on any gifting you should be doing to take advantage of the current tax situation.
Lifetime Estate Tax Exemption
Currently, the lifetime estate tax exemption is $12,060,000 per person. This is the total amount any one individual may give away, free of estate tax, during his/her lifetime. Married couples may give away twice that amount, $24,120,000. Moreover, a surviving spouse who elects for portability can claim for him/herself any unused portion of the deceased spouse’s exemption.
In 2023, the individual lifetime estate tax exemption will increase to $12,920,000 per person, or $25,840,000 for a married couple.
Annual Gift Tax Exclusion
The annual gift tax exclusion is the amount an individual can give to one or more individuals in any given year, without decreasing their lifetime estate tax exemption. In 2022, that amount is $16,000. In 2023 it will increase to $17,000.
To illustrate how this works, let’s say Mary Smith has three children and has not made any gifts during her lifetime, and thus still retains her full $12,920,000 exemption (the 2023 number). In 2023, she could give each of her three children up to $17,000, and her lifetime exemption of $12,920,000 would remain unaffected. She would be able to make make gifts to anyone she wants, not just her children. As long as the gift to each individual does not exceed $17,000, her lifetime estate tax exemption is unaffected. If Mary is married, she and her spouse can double the tax-free money they can give as gifts.
Note that if you give any individual more than $17,000, it is not a taxable event for you or for the recipient. However, you, the giver, must report the excess over $17,000 by filing a federal gift tax return. The excess is then deducted from your lifetime federal estate tax exemption.
Also, you are not limited to $17,000 if you pay someone’s educational or medical expenses directly to an educational or medical institution. For example, Mary could pay $200,000 for someone’s medical treatments, or $50,000 for a grandchild’s annual college tuition, without those amounts being deducted from her lifetime exemption.
Beware the Sunset Provision
While most people do not have to worry about paying estate taxes while the estate tax exemption is at its current high levels, it’s vital to remember that the exemption will decrease dramatically on Jan. 1, 2026 (assuming Congress takes no action). At that time, the exemption will revert to $5,000,000, its level prior to the 2012 American Taxpayer Relief Act. The number will be adjusted for inflation, and will probably end up somewhere in the $6,000,000 – $7,000,000 range.
Nursing home expenses can take a huge bite out of a person’s assets, even someone well off by today’s standards. A private room in a Florida nursing home now costs over $100,000 annually. Any gifts made during the five-year period prior to application for Medicaid nursing home benefits will be examined by Medicaid. Those gifts will be totaled and used to calculate a penalty period during which an otherwise eligible person is not eligible for benefits and must pay out of pocket.
In other words, gifts you make during the lookback period may not be taxable under federal tax law, but from Medicaid’s point of view, a gift is a gift is a gift, regardless of its tax status. Any gifts you make could conceivably come back to bite you. Before you embark on a gifting program to reduce your federal estate tax exposure, you should discuss Medicaid and long-term care expenses with your estate planning/elder law attorney.