The IRS May Be a Friend to Higher Net Worth Taxpayers

The IRS recently proposed regulations and announced increased gift and estate tax exemption amounts that offer significant opportunities for higher net worth taxpayers who want to make large asset gifts to others. Under the Tax Cuts and Jobs Act, the lifetime federal gift and estate tax exemption amount increased from $5 million to $11.18 million per individual for 2018 and will increase to $11.4 million in 2019. If you have a higher net worth, you now have enhanced gifting options to potentially save on taxes. However, you might not want to delay any such moves and act before the proposed “sunset” date of December 31, 2025, at which time the exemption reverts to the previous $5 million per person (adjusted for inflation). Another consideration of your timing in implementing your gift giving is that any future government administration could possibly change the law again. It may be a use it or lose it proposition. In any event, look at this as a gifting bonus that, if employed, should be initiated sooner than later. You should first look at your overall financial picture, including anticipated future earnings, asset appreciation, taxes and other income. Then, with your qualified estate attorney and tax planners, you will want to consider possible rates of inflation, how to protect your assets, minimize tax consequences, and reduce future liabilities that may be related to your gifting. Let’s look at a quick example and say that Mr. Smith has $15 million in assets and decides to give away the maximum allowable exclusion of $11.4 million in 2019. This means that he will have $3.6 million remaining for his own living expenses after making the gift If this proposed regulation is not passed and the tax exemption exclusion reverts to $5 million after 2025, it is possible that Mr. Smith’s estate would get a huge tax bill if he were to die after 2026. Basically, the tax system would still account for all $15 million in assets, regardless of gifting, resulting in about 40% of his estate being taxed. Even with the $5 million exemption, he is still paying $4 million in tax from his original total. Obviously, much of the exclusion is lost, which is often referred to as a “clawback.” However, if the proposed regulation does pass, there would not be a clawback and therefore no tax on the assets that had been gifted. Therefore, Mr. Smith would only owe taxes on his remaining $3.6 million and his gift would be exempt and tax free. This would result in a huge tax savings comparatively, and it would act as a way to avoid a clawback. The IRS is holding public hearings in Washington, DC in March to finalize the regulations, but, considering the benefits, it’s doubtful that taxpayers will object to the proposal. Even if you are not a high net worth individual, there are many tools at your disposable to protect you and yours while you are alive and after your death. If you have questions, contact Terri Hilliard, PC at 805-201-2552 or e-mail, and sign up for our newsletter. Photo courtesy of Alpha Stock Images –

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