I'm Natalie Perry, an ACTEC Fellow from Wheaton, Illinois.
I'm here today with Bob Temmerman, an ACTEC Fellow from San Jose, California. Today we're going to spend some time talking about the gift tax exemption and the estate tax exemption. Bob, could you give us a little background on what these exemptions are for, when they're used and their current amounts?
Sure, Natalie. I’d be happy to. I've been practicing trust and estate law for 40 years and I have seen the exemption grow from $600,000 to its current level of $11.58 million. A few years ago the estate tax exemptions doubled from $5 million to $10 million, and those are now indexed to inflation. So, the exemption from any sort of transfer tax is currently $11.58 million for transfers occurring in 2020. For a married couple, that's a little over $23 million. Now, those exemptions are scheduled to phase out at the beginning of 2026 under existing law. Obviously, Congress and the president can change those; and it might change earlier than that, and who knows what the future holds with respect to what future Congresses and politics will give us. But right now, those exemptions are historically the highest we've ever had. Will they be cut back before 2026? Your guess is as good as mine.
Well, given the uncertainty, how does someone know when is a good time to use their estate tax exemption? Can you describe the considerations?
First of all, I’d just like to preface my response by saying, the exemptions and the use of them during lifetime is really for high net worth clients. By that I mean clients with an estate of $10 million plus and maybe significantly larger than that. I'm finding today we are having clients make lifetime gifts of a sizable amount. You want to use up that exemption while it is available; and so many of my clients, particularly this year - an election year- are planning to use that exemption. But for the vast majority of our clients, and the vast majority of those that are just doing estate planning, the use of the exemption isn't really even a consideration if the estate is modest, or under what I would call $10 million. It’s not necessary to even think about.
So, if someone does make a gift and uses some of their exemption, does that mean they have to pay tax?
Not necessarily. It would have to be a large gift, before tax is imposed. Congress and our current tax laws have said that if you make a transfer less than $11.58 million, you have to file a gift tax return, and you use that exemption up during your lifetime. But, you don’t have to pay a tax until you exceed that exemption. So, the first dollar over $11.58 million is taxed at 40 percent. So, for the vast majority of my clients – they don’t like paying tax and they would prefer never to pay a tax. So, most of the time when we are doing gift tax planning, we are doing it with the idea of not paying a tax.
Thanks, Bob. That’s really helpful. I think one thing we didn’t touch on yet is the state estate tax. And can you touch on that briefly before we wrap up?
Every state is different. I come from California and we repealed our inheritance tax some time back. There are some ballot measures that may try and change that for some wealthy clients and we’ll see if that happens. Every state is a different jurisdiction and it's really important, in my opinion, for families to consult their tax advisors when considering doing any sort of planning that involves, not just federal taxes but also local taxes.
That's a great point. Clients should definitely keep that in mind. Well, thanks for being here today, Bob. It was very helpful.
Thank you, Natalie. It's been a pleasure being of assistance to you and to any of those viewers who happen to be considering making any sort of lifetime gifts.