Magic 8-ball guesses about estate tax exemption amount

[cathy63]

Thanks for all the replies and comments.

I have great respect for @cathy63's knowledge and have seen at least one professional article somewhere supporting her description in post #22.

I'm not concerned with notions of fairness (post #24). At the moment I'm concerned with understanding the rules in order to help implement the best strategy for the situation I'm familiar with.

The takeaways I have at the moment, assuming post #22 is accurate:

1. While the rule is written simply and is therefore just a rule, the effects in its implementation vary conceptually: the $8M More Aggressive Gifter (MAG) is effectively taxed on their "leftover estate" of $4M and not at all on their earlier gifting whereas the $2M Less Aggressive Gifter (LAG) is effectively taxed on their "total starting estate" of $6M.

2. The LAG really has very little incentive to take advantage of the currently higher exclusion amount. They get taxed on $6M whether they gift or not (well, except any gains on their earlier gifting does end up in the recipient's estate, so I guess there is that), and gifting earlier just may raise concerns in their mind of keeping enough for themselves.

3. The MAG benefits, but not as much as it may first appear. For giving away $8M, they only grow their BEA by $3M (because they'd get the $5M BEA anyway if they did nothing).

@cathy63, do you know if these new rule modifications are embodied in the current estate tax instructions somewhere? And if so, specifically where? I'm going to go look, but I'm not very familiar with the document and it's easy to overlook or miss things of this nature.

Right. The only way you can benefit from the current temporary higher exclusion amount (without actually dying) is to give away more than the exclusion amount will be when you die. If you can't do that, then your estate will end up in the same position it would have been in if there had never been a temporary increase.

As for estate tax instructions, I don't think the form and instructions will be updated until 2026. Until then, the only thing we have would be the examples in the tax code: https://www.law.cornell.edu/cfr/text/26/20.2010-1

 

[socca]

I am interested in what your magic 8-ball says about the estate tax exemption amount over the next five years.
...
I am particularly interested in ... whether people think the "Making large gifts now won’t harm estates after 2025" paradigm will continue to remain in place or will be eliminated.

I will be helping someone revise their estate planning documents later this year. I always create a spreadsheet so the person can see how their cash might flow during estate settlement. I will be assuming (1) a maximum lifetime gift exemption of $1M and (2) a 50% gift tax rate. This assumption is not (1) a prediction of the policy that might be in place when the person dies, or (2) a personal preference. Instead, this is merely the type of cautious position I like to take when budgeting.

I'm not worried about the future implementation of a clawback procedure where a person gifts under a generous lifetime gift exemption policy that is later reduced. Why? Well, what would happen if a particular estate doesn't have sufficient assets to pay the clawback taxes? This could happen if someone decides to give away most of their assets during their lifetime and live off the income from an irrevocable trust, for example (I'm not claiming this is a good idea; it's just a possibility).

I'm not an expert in these matters so YMMV.

 

[SecondCor521]

At this point I think I'm back to recommending annual gifting below the $15K limit to kids and grandkids each year in the case I'm helping with. Possibly also paying for some college for some of the grandkids, since that is also exempt from the unified gift/estate tax. Maybe chat with a good estate planning attorney, but those folks often think everything looks like a nail for their attorney hammers.

What is frustrating is that the estate tax law can change faster than a person can respond. A person who is a few million over the exemption amount has to either (a) try not to die at an inopportune time, (b) try to anticipate the changes and gift for years ahead of time to manage the exposure, (c) implement more costly tax avoidance strategies (fancy trusts like GRATs), or (d) give up and just pay the tax.

Ah well, #firstworldproblems I suppose.