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Transfers of property from one person or estate to another are considered taxable events by the Internal Revenue Service. These taxes are often referred to as gift taxes and estate taxes. They include any asset such as cash and property. The good news is the IRS has tax exemptions for these taxes. Only transfers of high value, a small percentage of all gift and estate transfers, actually trigger paying money to the IRS.
The tax exemption limits for gifts and estate transfers for gifts and estate change depending on current politics and policies. Many people thought these limits would decrease in 2022 due to the Build Back Better Act, meaning smaller gifts and estate transfers would have been taxed. In fact, the limits increased in 2022, and the higher rates will stay that way through 2026. In 2026 the tax exemptions are scheduled to revert to following the 2012 Act levels.
This increase allows higher net worth individuals to shelter assets from tax consequences in their estate planning strategies through 2026. A gift tax is paid by the person giving the gift, and the estate pays the estate tax before it transfers to the heirs. Please note that these taxes and exemptions are federal. Some states may have additional taxes and exemptions.
Current Estate Taxes Limits
As of 2022, an individual’s estate worth 12.06 million dollars or less is exempt from estate taxes when bequeathed to heirs. This amount doubles for a married couple to 26.12 million. Estates worth more than those values will incur taxes for any amount higher than the exemption. The rate increases proportionately according to the amount over the exemption. For example, an individual’s estate worth 12.07 million dollars would have .01 million taxed at about 20 percent. However, an individual’s estate worth 15 million dollars would have almost three million dollars taxed at 40%.
Estate Tax Exemptions after 2026
Few people know when their estate will transfer to their heirs. That makes planning around laws set to expire almost impossible. Unless a new act passes, the estate tax exemption will revert to about five million dollars, adjusted for inflation, in 2026. It is important to plan how you want to transfer your assets to your heirs so that they receive the maximum amount. Planning is especially important for people with estates worth more than the tax exemption levels.
Gift Taxes and Exemptions
If you are in the wonderful situation of having more money than you need, you can give significant amounts to others and see them reap the benefits without incurring taxes. You can give up to $16,000 per person annually without paying any gift taxes. There is a lifetime limit of 11.7 million dollars. However, you cannot accumulate years of exemptions. For example, if you give nothing one year and then give $32,00 the next year, you would pay taxes on the $16,000 over the exemption limit. Remember, these amounts are per individual, and married couples can usually double that amount.
Giving Gifts as a Strategy for Estate Planning
Some high-net-worth people use gifts to their heirs’ advantage. They will give the maximum amount annually rather than accumulate it into the estate. That would reduce the worth of the final estate, thereby sheltering some portion of the assets from tax liabilities. A gift tax is paid by the person giving the gift, and the estate pays the estate tax before it is transferred to the heirs.
Complexities of Estate Planning
Taxes are not the only aspect to consider when planning your estate transfer and giving. You also want to think about your legacy goals and the capabilities of the people receiving your generosity. For example, you may need to set up trusts and contingency plans. An estate planning attorney can help you think through different options and advise you about how to protect your estate for the benefit of your heirs.
For assistance, please contact our office at (212) 920-6371.