This is a guest article from PNC
The exclusion amounts currently available for the federal gift and estate tax and generation-skipping transfer tax, sometimes individually or collectively referred to as transfer tax(es),1 may prove to be a once-in-a-lifetime opportunity to pass significant wealth to children, grandchildren, and more distant generations in a tax-efficient manner. Individuals and families wishing to capitalize on this tax-saving opportunity may have to act fast since the currently expanded exclusion amount is set to expire at the end of 2025. Moreover, the exclusion amount may change even earlier if Congress enacts legislation reducing the exclusion amount before then.
As discussed below, we recommend that individuals and families for whom intra-family gifting is part of their wealth planning strategy:
- consider making meaningful transfers of wealth now, before the exclusion amount changes;
- confirm that other planning objectives are met before undertaking further gifting; and
- where appropriate, incorporate flexibility into wealth transfer plans to address possible changes in legislation or changes to personal and financial circumstances.
We suggest that you discuss these recommendations with your legal and tax advisors.
The Current Opportunity
The Tax Cuts and Jobs Act of 2017 (TCJA)2 created a significant opportunity to tax-efficiently transfer wealth to the next generation and beyond, effectively doubling the gift and estate tax exclusion and the generation-skipping transfer tax exclusion from the limits in effect in 2017. The exclusion amount is indexed for inflation and for 2023 is $12.92 million per person ($25.84 million for a married couple) and is subject to further adjustment for inflation through 2025. For individuals and families willing and able to make significant gifts, this represents an unprecedented opportunity to transfer assets to younger generations at a much-reduced transfer tax cost.
This increased gifting capacity is not permanent. Assuming no changes, the current exclusion amount (as further adjusted for inflation) is set to expire on December 31, 2025. Beginning January 1, 2026, the exclusion amount will be decreased to $5 million, indexed for inflation. Although the exclusion amount in 2026 had been projected to be approximately $6.4 million, increased inflation may render that estimate obsolete. If today’s elevated inflation rates continue for the next three years, it is possible that the exclusion amount in 2026 could be approximately $8 million per person.3
To Gift or Not to Gift?
For individuals and families who wish to pass assets to children, grandchildren, and (perhaps) more distant descendants as part of their overall wealth transfer plan, gifting now, rather than later, could provide significant benefits to the family. Yet lifetime gifting is a balancing act, where the benefits of making gifts today should outweigh the potential disadvantages. Determining whether to make substantial gifts to future generations is a complex decision and is dependent on a number of factors.
For many, thoughtful planning can capture many of the advantages of lifetime gifting while minimizing the impact of potential disadvantages, such as the few pros and cons of gifting that are highlighted in the graphic above. A discussion with your tax, legal, and financial advisors can help you decide what is right for you and your family.