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Here is a question that we receive on an almost daily basis from our clients:  “I’ve read in the news that the estate and gift tax exemption is going to be reduced.  How can I take advantage of the current exemptions before they are cut?”

Right now the current gift and estate tax exemption for each person is $11.7 million.  That means that, under current law, each person can give away $11.7 million of assets during their lives and at their death before they start paying gift or estate taxes.  A married couple can give away up to $23.4 million before paying any transfer taxes!

However, those high exemption rates won’t be with us forever.  Those exemptions are scheduled to be cut in on January 1, 2026.

But things get worse.  The House Ways and Means Committee released a draft bill which would reduce the estate and gift tax exemption to about $6,000,000 per person, or $12,040,000 for a married couple.  These changes will be effective as of January 1, 2022!

The draft bill is still working its way through Congress and faces substantial hurdles.  We simply don’t know if it will be passed, or what the final bill will look like.  But if you want to make sure you take advantage of the current high exemptions, you have to act now.

So how do you take advantage of the current high exemptions?  You have to give away more than what the future reduced estate and gift tax exemption will be, and you have to do it by January 1, 2022!

What if I use less than the anticipated $6 million future exemption this year?  Does that preserve any of the current high exemption?

No.  Under 2019 regulations published by the IRS, estate and gift tax exemptions are applied on a bottom-up basis.  This means that, assuming the exemption on January 1, 2022 will be $6 million, I have to give away more than that to use the current high exemption amounts.

For example, assume that I used $10 million of my estate/gift tax exemption this year, and the exemption is reduced to $6 million in 2022.  Beginning in 2022, I would have used all of my lifetime exemption, and I was able to get another $4 million out of my estate by making gifts while the exemptions were higher. 

If I only used $3 million of my exemption in 2021, and in 2022 the exemption is reduced to $6 million, then going forward  I would only have $3 million of exemption left.

So why is this important?  Under current law the estate/gift tax rate for assets passing in excess of the gift/estate tax exemption is a flat 40%.  In my example above, the extra $4 million that I was able to get out of my estate will result in $1.6 million in less estate and gift taxes. 

Even if the current bill is not enacted (it is a long way from getting out of Congress and onto the President’s desk), clients with estate tax planning needs still need to consider fully utilizing their exemptions before they are reduced in 2026.

If you have questions about the current bill or about your estate tax planning needs, please do not hesitate to give us a call.  And please check back for further updates on the proposed estate tax legislation.