Even the current law contains a provision that will cause the exclusion amount to drop to $5,000,000 plus an inflation adjustment in the year 2026 (resulting in an exclusion amount of approximately $6,000,000).
Depending at least in part upon the outcome of the upcoming election, we could face another change to the gift and estate tax exclusion amount. There are proposals to drop the exclusion amount to $5,000,000 or even $3,500,000. If the exclusion amount drops, some individuals who would not face the payment of estate tax at their deaths under current law would have estate tax due.
What does this mean for you? First, you should make sure your estate plan meets your needs. Wills and revocable trusts can contain planning to reduce or possibly eliminate estate tax due at your death. You should understand whether your plan does contain, or should contain such planning and whether any updates to your plan are recommended.
Second, depending upon the value of your estate, it may be appropriate to gift some assets to take advantage of the higher exclusion amount while it is available. There are several considerations involved with gifting, including taking into account all tax implications of the transfer, such as income tax. Also, if the plan is to gift assets to take advantage of the exclusion amount before it drops, then the gift only achieves this goal to the extent the gift uses up more of the exclusion amount that you will have under the new tax regime.
For example, you currently have $11,580,000 of exclusion available, and it is scheduled to drop to around $6,000,000 in the year 2026. In order to take advantage of the current higher levels, you would need to make gifts totaling more than $6,000,000. For example, if you give $10,000,000 now, if the exclusion amount drops to $6,000,000, you will not have any exclusion amount left, but you will have moved the entire $10,000,000 out of your estate without paying any gift or estate tax. In contrast, if you give $10,000,000 after the exclusion amount drops to $6,000,000, then the difference of $4,000,000 will be subject to the gift tax. The current gift and estate tax rate is 40%.
This article only discusses the federal estate tax. Colorado does not currently impose an estate or inheritance tax, but other states do, and their laws vary from state-to-state. The estate planning attorneys at Lyons Gaddis can advise you on gift and estate tax planning, and other matters.
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