The estate and gift tax exemption limit is currently at a historical high. In anticipation of a significant decrease in the established limit in 2026, we’re taking a look at a few strategies for consideration, in order to leverage this unique situation through tax-efficient wealth transfer.

Estate and Gift Tax Exemption: Looking Ahead

In 2021, the current estate and gift tax exemption is $11,700,000 per person ($23,400,000 for married couples), the highest it has ever been. The estate and gift tax exemption is set to “sunset” on December 31, 2025 to the prior estate tax exemption of $5,000,000 for individuals ($10,000,000 for married couples) indexed for inflation. Although no one knows yet what the estate exemption will be on January 1, 2026, it is projected to be in the range of $6,400,000 to $6,800,000, per person.

Furthermore, the Internal Revenue Service (IRS) issued regulations in 2019 that there would not be a “claw back” for lifetime gifts made under the expanded exemption. This regulation states that, generally, the higher of the two exemptions will be used; either the exemption applied during the lifetime gifts transfer or the exemption on the date of death.

Understanding the Implications

This means that for individuals facing estate tax liabilities, there is a unique window of opportunity to take advantage of the current gift tax law. The current gift tax environment, combined with low interest rates, creates a rare configuration. Individuals can benefit by accelerating gifting now, thereby reducing their taxable estates and transferring wealth to the next generation in a tax-efficient manner.

Removing future appreciation from your estate, by gifting assets that you expect to substantially appreciate before you die, is one of the major advantages of making lifetime gifts. This can be especially useful for real estate or shares of a business that may have depreciated temporarily due to the Covid-19 pandemic.

Tax-Efficient Wealth Transfer Strategies

There are many strategies to transfer wealth to the next generation leveraging your lifetime gift tax exemption. One method is outright gifting. This is the simplest and easiest method. You simply give assets away directly to an individual or individuals. The assets can be cash, investments, percentage ownership in businesses, or collectibles, to a name a few.

Another strategy is to gift to a trust for the benefit of a beneficiary or beneficiaries. By gifting to a trust, you have more control of how and when a beneficiary may use the gift. This may be especially important if your beneficiaries are young and you want to give them time to mature before taking on the responsibility of sizable financial gifts. Likewise, it can be beneficial to use trusts to ensure assets stay within the family bloodline in case there is a future divorce.

Important Considerations

One of the major disadvantages to making gifts during your lifetime is the loss of the stepped-up cost basis. Assets gifted during life include the cost basis of the giver, referred to as carry over basis, compared to assets gifted at death that receive a stepped-up cost basis.

One strategy to lessen this affect is to gift assets with a high costs basis, therefore reducing the capital gains tax for the beneficiary in the future.

There are many factors to consider when deciding whether making lifetime gifts makes sense for you. A customized financial plan can help you balance your own lifestyle needs and the potential estate tax savings of making lifetime gifts.

This is a unique, narrow window of opportunity to shift assets, including businesses, to the next generation. Determining whether to take advantage of this tax-friendly environment to make lifetime gifts involves many considerations: if you should gift, how much you should gift, what assets to gift, and what structure to utilize.

Before starting any major gifting, it is always a good idea to discuss your intentions—and the advantages and disadvantages—not only with your Financial Advisor, but also with your attorney and tax advisor.

WORKING WITH JANNEY

Depending on your financial needs and personal preferences, you may opt to engage in a brokerage relationship, an advisory relationship or a combination of both. Each time you open an account, we will make recommendations on which type of relationship is in your best interest based on the information you provide when you complete or update your client profile.

When you engage in an advisory relationship, you will pay an asset-based fee which encompasses, among other things, a defined investment strategy, ongoing monitoring, and performance reporting. Your Financial Advisor will serve in a fiduciary capacity for your advisory accounts.

For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs, which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.

By establishing a relationship with us, we can build a tailored financial plan and make recommendations about solutions that are aligned with your best interest and unique needs, goals, and preferences.

Contact us today to discuss how we can put a plan in place designed to help you reach your financial goals.

Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting, or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

About the author

Laura Medigovich

Vice President/Senior Financial Planner

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For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.

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