In an effort to provide Americans with various forms of tax relief, in 2017 Congress enacted the Tax Cuts and Jobs Act (“Tax Act”). This act provided tax reductions in many different categories, but one of the most significant was that it nearly doubled the Estate Tax and Lifetime Gifts Exemption (“Exemption”). However, these tax cuts were not made permanent and are set to expire on December 31, 2025, unless Congress acts to extend them. There is great uncertainty whether such an extension will occur, and most political commentators are quite skeptical about an extension. Upon expiration, the Exemption will decrease from the current amount of $13.61M to ~$7M in 2026 (estimated amount adjusted for inflation).

The fate of the Exemption, and millions of American taxpayer dollars, rests in the hands of politicians. Taxpayers who would like to take control of the destiny of their wealth and who are in a position to use the current significant lifetime gift Exemption before it expires stand to save a great deal of money in taxes and thereby transfer substantially more wealth to the next generation.

When a taxpayer makes a lifetime gift and files a gift tax return claiming the Exemption, Congress has made it clear under Treasury 20.2010-1(c) that such a lifetime gift will be valid even if it exceeds the amount of the exclusion in effect at the time of a taxpayer’s death. In other words, such gifts will not be subject to a “clawback” by the IRS but instead will stand, allowing the taxpayer to transfer assets to the next generation well beyond a potentially lower exclusion amount in the future. The key here is that the gift must be in excess of the pre-2017 exemption because the accounting method the IRS uses for calculating a taxpayer’s utilized portion of the Gift Tax Exemption is cumulative. Similar to filling a bucket, the first dollars gifted will begin to accrue against the taxpayer’s total Estate Tax and Lifetime Gift Exemption—but the oldest exemption amounts are deemed to be used first. Consequently use of the additional 2017 exemption amount will only occur once the exemption “bucket” has been filled in excess of the taxpayer’s original exemption amount.

For example, if a taxpayer that had a $17,000,000 estate had not yet used any of his taxable Exemption, he could make a gift of $13,610,000 to his daughter in 2024, and no gift tax would be due on the gift. But if that same taxpayer waited to make the gift until his death, and the Exemption amount sunsets, then his estate would pay taxes in accordance with the lower exclusion amount of approximately $7,000,000. The taxpayer could save estate taxes by gifting amounts in excess of the lower future exclusion while the additional $6,610,000 of 2017 Lifetime Gift Exemption was still available, which means he would have reduced his estate’s tax bill by an amount in excess of $2.3M. However, a gift of $7 million would not save any of the taxpayer’s extra tax exemption amount which was granted under the 2017 Tax Act. Instead, the taxpayer will be deemed to have used his original $7 million gift tax exemption amount and will not have used any of the extra exemption amount.

The good news is that a carefully executed estate plan can take advantage of the current larger tax exclusions. Instead of waiting for politicians to decide the fate of their estate, taxpayers should begin to plan now for the possible expiration of highly favorable tax provisions.