The amount of money you can pass to your family through your estate is at an all-time high. But it will go down by at least 50% in 2026. Then big tax bills will be owed by your family.
Right now, if you were to die, the government allows $11.7 million of your estate to pass to your family tax free. And this amount is available to both spouses. Basically, if you and your spouse were to pass away today under the current “estate exclusion limits” $23.4 million could be passed to your children tax free. This also means that anything over $23.4 million is subject to estate taxes of roughly 40%.
Yet, the government has the ability to change the “exclusion” limits from time to time. Since about 2011, the trend has been to increase the limit. For example, in 2002 you could only pass $1 million dollars per spouse tax free. In 2011, it was increased to $5 million dollars per spouse tax free. The current estate tax free amount of $11.7 million per spouse is the highest amount ever.
However, in 2026 the amount is going to decrease… a lot. The current $23.4 million amount is only in place until the end of 2025 because the rules are changing in 2026.
Like most things in the government, it is hard to say exactly what will happen in the next five years, but we do know that a drop of at least $6 million per spouse is going to occur. This drop may even be lower. There is current legislation in place that would lower the limit to $3.5 million per spouse.
This means that if you do nothing before 2026, your family gets a lot less of your estate because they will have to pay a lot more in taxes.
How do I take advantage of the historically high limits before the change in 2026?
Unfortunately, one way to take advantage of the “exclusion amount” is to die before 2026. Not the preferred option, but you/your spouse automatically get the exclusion limit that is available for the year in which you/your spouse die.
The other option is to start giving substantial gifts to your family. If you give less than $6 million then you are not taking advantage of the current limits. Right now, there is no “clawback” regarding the exclusion limits. This means that if you and/or your spouse were to gift away an amount closer to $11.7 million per spouse there would be no estate taxes owed for that amount, even if you die after 2026 and the exclusion amount has dropped to $6 million or lower per spouse.
What does all this really mean?
If you have any estate that is over 12 million dollars, and you were to pass after 2026, your family could be paying significant estate taxes. If you gift to them before 2026 while you’re alive, they won’t have to pay these taxes.
If you and your spouse were to gift between $6 million and $11.7 million per spouse before 2026 you are passing considerably more money to your family and they are paying much less in estate taxes (because no taxes will be owed on gifts within these amounts).
Even if you have any estate closer to $7 million, you could still be affected if the pending legislation were to go through. It may make sense for you to consider gifting options as well.
Bottom line, right now is the best time in history of the US tax rules to make tax free gifts to your family.
So, what assets should I gift?
This all depends upon the value of the asset and the expected growth of an asset. It also depends on what you paid for it and what it’s worth today. For many assets, when someone dies and it gets passed to a family member, that family member gets what is known as a “step up in basis” tax free. Basically, they get the current value without having to pay taxes on the gain in the asset had during your lifetime. It’s also important to realize that if an asset loses value, a write off for the loss isn’t easily captured when gifted.
In short, assets that are worth what you paid for them but are likely to go up over time would make the most sense to gift first. But you should sit down with your estate planner and really take a look at all the options available.
If you fail to act, you could potentially be leaving $5 – $10 million on the table. That money should go to your family, not taxes.
When can we talk about paying less taxes?
Call us and let’s set up an appointment.
