Prepared by Gina Lee, Senior Associate at Klug Counsel
Every year, the estate and gift tax “basic exclusion amount” (commonly known as the “estate and gift tax exemption amount”) is adjusted for inflation. The Tax Cuts and Jobs Act passed in 2017 doubled the estate and gift tax exemption amount from $5 million to $10 million, adjusted for inflation. The amount is set to go back to $5 million, adjusted for inflation, on January 1, 2026.
The current exemption amount for tax year 2022 is $12,060,000 per decedent/donor. For tax year 2023, the estate and gift tax exemption amount will increase to $12,920,000, which is an $860,000 inflation adjustment for 2023. The 2024 and 2025 inflation adjustments could be even higher, pushing the estate and gift tax exemption amount to be approximately $14,000,000 by 2025.
Internal Revenue Code Section 1(f)(3) contains the formula used to determine the annual inflation adjustment. Essentially, the formula uses inflation rate and the basic exclusion amount to determine each year’s estate and gift tax exemption amount. In the past, the combination of muted inflation and a small basic exclusion amount meant the inflation adjustments were not particularly significant for estate and gift tax purposes. For example, the 2016 inflation adjustment for the estate and gift tax exemption amount was a mere $20,000 (from $5,430,000 to $5,450,000). However, due to the high inflation in recent years and a large basic exclusion amount, the estate and gift tax exemption amount will greatly increase in the next few years.
High-net-worth individuals are to benefit from these inflation adjustments. Those who have used up all or a substantial portion of their current gift tax exclusion amounts will be able to move additional assets out of their estates ahead of the scheduled reduction in the estate and gift tax exemption amount on January 1, 2026. Those who still have a large amount of unused exemption amount soon will have even more. High-net-worth individuals should think about gifting opportunities now, rather than waiting until 2025.
Another planning opportunity would be through portability. Portability is a way for spouses to combine their estate and gift tax exemptions. More specifically, if a spouse dies with a significant amount of unused estate tax exemption, it can be “ported” to the surviving spouse to be used during his or her lifetime and at death. Whether or not the estate and gift tax exemption amount is reduced, the ported amount is based on the exemption amount in the year of death of the first-deceased spouse, not the year it is eventually used by the surviving spouse.
Gina Jeyoung Lee is a Senior Associate at Klug Counsel. Gina is involved in individual and business tax planning and compliance, as well as domestic and international estate planning. Gina’s experience includes preparing and reviewing individual and business tax filings, preparing tax planning memoranda, and drafting estate planning documents. Klug Counsel PLLC represents companies, start-ups, private equity funds, family offices, and high-net-worth individuals. Through their strategic partnerships with law firms and other professional service firms in the U.S. and around the world, they are able to meet the tax and business needs of their clients in the U.S. and internationally.