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Most Americans have estates that fall under the federal estate and gift tax exemption. However, the exemption is set to be cut in half in 2026. This exemption increased to $13 million (actually $12.92 million) in 2023. In 2026, this exemption resets to $6.8 million (adjusted for inflation between now and then) unless Congress acts in the interim. What happens if you make a taxable gift before 2026 but die after 2026 when the exemption has been cut in half?
The annual gift tax exclusion is $17,000 in 2023. This means annually you can give $17,000 to as many individuals as you like without filing a gift tax return. But if you give anyone more than $17,000 per year, you'll need to report the excess on a gift tax return. It's unlikely that you'll have to pay any tax because the gifts are only taxed when they cumulatively reach the $13 million exemption.
For example, If you give your child $2 million in 2023, you’ll have to report a taxable gift of $2 million. If you die before 2026, your estate tax exemption will be $11 million ($13 million exemption - $2 million gift) instead of $13 million.
If you die in 2026 or later, your estate tax will be calculated as if the higher exemption never existed. As a result, you won’t benefit from the $11 million exemption that was in effect when you made the $2 million gift in 2023.
To take advantage of this exemption, you must make a larger gift prior to 2026. If you gave your child $10 million in 2023 instead of $2 million, $10 million would be your new estate exemption instead of $6.8 million if you died in 2026 or later. Everything else in your estate would be subject to tax, but the $10 million given to your child would still be gift and estate tax-free.
The IRS has ruled that, beginning in 2026, your estate tax exemption will be the greater of the estate tax exemption in place ($6.8 million in 2026) or the total taxable gifts you have made during life prior to 2026.
If you’re affected by these rules, don't try taking any tax planning steps on your own. Without proper planning, you might lose out of using federal and gift tax exemptions that are available. There are a lot of complexities that are involved. Talk to an estate planning attorney in Ann Arbor before doing anything.
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