LK0823

By Bernard A. Krooks, Certified Elder Law Attorney 

With the Presidential election coming up next year and the primary season right around the corner, it got me thinking about how quickly time flies. It seems like only yesterday when the Tax Cut and Jobs Act of 2017 (TCJA) was signed into law. That law made changes to, among other things, the estate tax laws; however, many of those changes are scheduled to sunset (expire) at the end of 2025. 

By way of background, the maximum federal estate and gift tax rate is 40 percent. However, you don’t have to pay gift or estate taxes until your combined gifts exceed your lifetime estate and gift tax exemption. One of the most significant changes made by the TCJA was to increase the federal estate tax exemption from $5.4 million to $10.8 million. That’s for the aggregate lifetime gifts, and bequests you make on your death since the estate and gift tax systems are unified. Moreover, the TCJA further provided that the enhanced estate tax exemption is indexed for inflation each year and now stands at $12.92 million, an $860,000 increase over the 2022 amount. Thus, a married couple in 2023 can leave up to $25.84 million ($12.92 x 2) estate tax-free to their family. 

In addition to the lifetime exemption amount, individuals are permitted to make annual exclusion gifts to as many people (and, in certain cases, trusts) as they like. In 2023, the federal annual gift tax inclusion increased from $16,000 to $17,000. For married couples, the annual gift tax exclusion is $34,000 ($17,000 x 2) for each gift recipient. Moreover, gifts made for medical or education expenses are not subject to the annual exclusion limitations provided that the gifts are made directly to the medical provider or educational institution. Payments of these amounts are not even considered a gift and you do not have to file a gift tax return. 

However, the foregoing is not the end of the analysis when it comes to estate and gift tax planning. In addition to the federal estate tax, New York has its own estate tax, and the maximum rate is 16 percent. Also, the New York state estate tax exemption is lower than the federal amount and currently is $6.58 million, an increase from last year’s amount of $6.11 million. However, unlike the federal exemption, the New York exemption is phased out for taxable estates between 100% and 105% of the exemption amount. Thus, for a New York estate that exceeds $6.909 million (105% of $6.58 million), the exemption is completely phased out and the entire estate is subject to New York estate tax. Practitioners refer to this as the New York state “cliff,” since once you are over 105% of the exemption amount, the entire estate is taxable, and you get no benefit from the $6.58 million exemption. Fortunately, New York state does not have a gift tax. However, gifts made within three years of death are subject to a clawback rule, which means they are included in the person’s taxable estate. 

If no steps are taken by Congress prior to 2026, the federal estate tax exemption is scheduled to sunset to the pre-TCJA (2017) level of $5 million, adjusted for inflation. Many practitioners think that the inflation-adjusted number will be around $7 million. The good news is that the IRS has announced that individuals who take advantage of the increased exemption for lifetime gifts prior to 2026, will not be adversely affected by a decreased federal estate tax exemption after 2025. Thus, if you made a $10 million gift in 2023 and the federal estate and gift tax exemption is lowered to $7 million in 2026, your gift is grandfathered, and you will not owe federal estate or gift taxes on that gift. However, you may still owe New York state estate taxes. 

Confused yet? Join the club. Even simple gifting should be undertaken with caution. In addition to estate and gift tax consequences, gifts can have an impact on income tax—both good and bad. For example, any income earned on the gifted asset will be taxed at the recipient’s income tax rate, which could be higher or lower than the donor’s rate. It’s a good idea to get a full analysis of your entire tax picture prior to making any significant gifts. Just keep in mind: proper planning takes time and 2026 is not that far away. No one really knows what’s ahead; now is a good time to determine what steps you should be taking, if any, to reduce your estate and gift tax exposure.

Bernard A. Krooks, Esq., is a founding partner of Littman Krooks LLP. He was named 2021 “Lawyer of the Year” by Best Lawyers in America® for excellence in Elder Law and has been honored as one of the “Best Lawyers” in America since 2008. He was elected to the Estate Planning Hall of Fame by the National Association of Estate Planners & Councils (NAEPC). Krooks is past Chair of the Elder Law Committee of the American College of Trust and Estate Counsel (ACTEC). Mr. Krooks may be reached at (914-684-2100) or by visiting the firm’s website at www.littmankrooks.com.