2020 Estate & Gift Tax Update
2020 continues the recent trend of an historically large federal
unified exemption amount for bequests and lifetime gift-giving, and
because of this significant change from earlier years, careful review of
tax planning provisions in existing estate planning documents is
warranted ‒ as well as consideration of lifetime gift planning.
Estate & Gift Tax (and GST) Exemption Amount for 2020
Two years ago, the exemption (or “exclusion”) amount for
federal estate, gift, and generation-skipping tax (“GST”) was slated to
increase slightly from the prior year, to $5.6 million per person for
2018. This amount suddenly nearly doubled (to $11.18 million
for 2018) when President Trump signed the Tax Cut and Jobs Act on
December 22, 2017. For 2020, with inflation adjustment, this
amount increases to $11.58 million per person (up from $11.4 million in
2019), potentially offering a $23.16 million exemption for a married
couple. This is the “unified exemption amount” for the sum total
of a person’s “lifetime gifts” (gifts in excess of the applicable annual
exclusion amounts in effect when the gifts were made), together with
the property passing to beneficiaries upon the donor’s death. This
figure also represents the current exemption amount for
generating-skipping gifts (e.g., gifts to grandchildren). Estates
(and/or lifetime gifts) in excess of $11.58 million are taxed at a
maximum rate of 40%. Generation-skipping gifts in excess of $11.58
million are taxed at an additional rate of 40%. For future years,
the new law provides for continuing annual inflation increases in the
exemption amounts through 2025. On January 1, 2026, in the absence
of future legislation, the exemption amounts are scheduled to revert to
the 2017 levels ($5.49 million + inflation adjustment).
One concern surrounding use of the current, high
exemption amounts for lifetime gifts has been whether the IRS would try
to “claw back” taxes on such gifts if a lower exemption amount ended up
applying at the time of the donor’s death. Effective as of late
November 2019, IRS final regulations on this matter (IR-2019-189) definitively eliminate such concern.
Income tax basis rules remain unchanged, with
inherited property receiving a reset of basis at date-of-death value.
North Carolina currently has no state inheritance, estate or gift tax.
Review of Estate Planning Documents for Outdated Provisions
In contrast to the high current federal estate and gift tax
exemption amount, as recently as 2008 the exemption amount was $2
million; in 2003 it was $1 million, and in 2001, it was $675,000.
This change has resulted in many outdated estate plans, and much of the
tax-avoidance attention in estate planning (for estates less than the
exemption amount) is shifting away from estate tax, focusing instead on
income tax considerations ‒ including efforts to maximize stepped-up
basis of appreciated assets and avoidance of capital gains. In
general, it is recommended that estate planning documents be reviewed on
a regular basis and whenever one experiences significant life changes ‒
or changes in dispositive wishes. It may also be important to
review estate planning documents to make sure estate tax planning
contained in earlier documents does not create any unnecessary income
tax burden under current tax law ‒ or cause other unwanted, non-tax
consequences.
Annual Exemption Gifts & Spousal Gifts
The federal annual gift exclusion amount for 2020
remains at $15,000 per donee which is the same as for 2019. This
exclusion allows an individual donor to give an unlimited number of
“annual exclusion gifts,” so long as the amount of each gift does not
exceed $15,000 per donee during calendar year 2020. (Generally,
married couples can give $30,000 per donee as long as certain measures
are taken.)
Annual exclusion gifts do not use up any of a person’s
lifetime “unified exemption amount,” and generally no gift tax return is
required. If you make a gift in excess of $15,000 to one donee,
you may still avoid paying a gift tax on the excess by filing a gift tax
return (IRS Form 709), with an election to use part of your unused
unified lifetime estate and gift tax exemption amount to cover the
overage.
As in years past, a person may give an unlimited amount to
his or her spouse by using the “unlimited gift tax marital deduction,”
as long as the donee spouse is a U.S. citizen. If the donee spouse
is not a U.S. citizen, tax-free transfers to the non-citizen spouse are
limited to a “super annual exclusion” amount, which increases to
$157,000 in 2020 (up from $155,000 in 2019). As with other gifts
in excess of annual exclusion amounts, the donor spouse may still avoid
tax by filing a gift tax return and electing to use his or her unused
lifetime exemption amount to cover the overage.
All annual exclusion gifts and spousal gifts must be
gifts of a “present” interest as opposed to a “future” interest, and
further qualifications can apply. It is recommended that you
consult your tax advisor prior to making a particular gift.
Other Tax-Free Gifting
Gifts to qualified charities may generally be made in
unlimited amounts, gift tax-free. In addition, certain direct
payments made on behalf of others are not considered “gifts,” and may be
made in unlimited amounts. These include direct payments on
behalf of another person to educational institutions for tuition and to
medical providers for medical care. These payments must be made
directly to the institutions or providers, however, or they will be
treated as gifts to the individuals. Because certain
qualifications apply, it is recommended that you consult your tax
advisor before making particular charitable gifts or payments on behalf
of others.
Update Reminder
As you contemplate your gift plans for 2020 and
review your current estate planning documents, consider also a review of
your beneficiary designations to confirm (1) that the designations are
what you think they are, (2) that they continue to conform to your
current wishes; and (3) that the designations are properly coordinated
with your overall estate plan. Special care should be taken when
beneficiaries are minors or are incapacitated.
You can find a discussion of IRA and life insurance beneficiary designations in "IRA and Life Insurance Beneficiary Designations: Time for a Tune-Up?"
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