The upcoming election and concern regarding potential changes have people asking questions about what they can do in 2020 to blunt the impact of a future change in the tax law.  One strategy for people with significant assets will be to give property away while the current tax laws are in place.

As many already know, the 2017 Tax Cuts and Jobs Act (“TCJA”) dramatically increased the gift and estate tax exclusion amount from $5 million per person to $10 million (adjusted annually for inflation) for gifts being made between December 31, 2017 and January 1, 2026.  On January 1, 2026, the exemption amount will return to $5 million dollars (also adjusted annually for inflation) unless Congress acts to pass a law that either (a) extends the date or (b) increases or decreases the exemption amount.

The scheduled reduction of the gift and estate tax exclusion amount back down to $5 million will have no practical effect for a US citizen that gives away less than $5 million in property because they will not have a taxable estate.  However, for people that believe they will give away more than $5 million, the $10 million exemption currently offered by the TCJA presents a planning opportunity.  Likewise, the $10 million exemption offers a planning opportunity to those concerned that Congress will pass a new law lowering the exemption below $5 million.

Last year, the IRS issued final regulations confirming that the larger $10 million exemption will apply to lifetime gifts made while the TCJA was in place even if the giver dies after it has expired.  For example, if a person has $13 million in assets and dies in 2027 having made no gifts during their life then (under current law without any adjustments for inflation) $8 million ($13m – $5m = $8m) will be subject to a 40% reduction for estate tax.  By contrast, if that same person makes a $10 million dollar gift in 2020, then only $3 million dollars of his/her estate would be subject to the estate tax.

In the example above, the giving strategy stands to save millions in tax liability.  However, there is no “one-size-fits-all” strategy for tax planning and there is a significant amount of planning that should go into how to properly structure and protect the gift.  Be sure to discuss your current plans and estate planning goals with a qualified attorney before implementing any tax planning strategies.