The federal estate and gift tax has a long history. Decedents dying in 2023 have a $12.92 million basic exclusion amount (BEA). For married couples, the BEA is $26.84 million. For the first time ever, the exemption will be reduced, by roughly 50 percent, beginning in two years, on January 1, 2026. That means the tax will be higher for taxpayers.
It is a good idea to revise your estate plan to ensure you take advantage of the higher BEA that is set to expire in 2026. One way to do this is by utilizing lifetime gifting.
In 2023, you may gift up to $17,000 ($18,000 in 2024) to an individual without incurring a taxable gift or affecting your BEA. If you gift above the exempted amount, this will affect your BEA. The estate tax is calculated by looking at what the decedent owned at death and adding back those taxable lifetime gifts to the estate, then reducing that amount by the BEA applicable at death.
One issue after January 1, 2026 will be: What are the tax consequences of a decedent who made non-exempt lifetime gifts within the BEA amounts allowed through the end of 2025, but in doing so they lower their BEA, and when they pass, the BEA is lower?
In November 2019, the government published regulations to address this issue, known as the “Anti-Clawback Rule”. The Anti-Clawback Rule says that if the value of lifetime taxable gifts are added back to the decedent’s gross estate, and at the time of death those gifts exceed the BEA, then the credit used to compute the decedent’s federal estate tax will generally be the BEA in effect for the taxpayer at the time of the lifetime gifts. Thus, this Anti-Clawback rule is an incentive for lifetime gifting for those from whom an estate tax might be due.
If you are in the position to make substantial lifetime gifts, it is a good time to revise your estate planning before the sunset date of January 1, 2026, and take advantage of the higher BEA we have today.