As September approaches, we are rapidly heading towards the end of the year. Individuals should consider implementing estate planning techniques before December 31, to take advantage of significant and potentially fleeting estate and gift tax savings opportunities.

The federal estate, gift and generation-skipping transfer tax exemptions (the amount an individual can give away tax-free) are at historic highs- $11.58 million per person. For married couples, who are able to elect for portability of any estate or gift tax exemption amount not used by the first spouse to die, the combined federal exemptions are now $23.16 million.

These exemptions provide opportunities for significant lifetime gifting beyond the $15,000 per donee annual exclusion and educational and medical care gifts. Lifetime gifting is an effective strategy for the tax-efficient transfer of wealth because lifetime gifts remove future appreciation on transferred assets from an individual’s taxable estate. Also, in states like Massachusetts where there is an estate tax, but not a gift tax, individuals can reduce their state estate taxes if they transfer assets through lifetime gifts instead of relying on transfers at death.

It is important to note that these historically high federal estate, gift and GST tax exemption amounts are temporary and slated to expire at the end of 2025, if not sooner. In 2026, barring a change in the law, the exemption amount will automatically revert to the prior $5 million per person, indexed for inflation. If the exemptions are not used before that time, they will be lost.

Clients should remember that the tax laws can always be changed, especially if there is a change in control of the government. Democratic party presidential nominee Joe Biden has proposed returning the exemption to $5 million (inflation adjusted) per person and other Democratic proposals have called for a reduction to $3.5 million per person. These decreases could come as soon as January 2021, if there is a change in control over the federal government in November. Given this uncertainty, individuals should consider using their current high tax exemptions as soon as possible.

The Treasury Department and the IRS have confirmed that if the exemptions decline there will be no “clawback” on gifts made during the period of the increased exemptions. This means, for example, if an individual makes a $7 million gift in 2020 and dies after the law changes and the exemption reverts to $5 million, such individual would not be subject to tax on the extra $2 million he or she gifted above the exemption applicable at his or her death. If the individual did not make the gift before the law change, his or her estate would be subject to tax on the additional $2 million. At a potential tax rate of 50%, the savings generated by gifting would be $1 million.

Please contact any of the attorneys in Pabian & Russell, LLC’s Estate Planning practice group if you would like to discuss how these concepts apply to your personal circumstances.