Key insights
- The lifetime exclusion limit for estate and gift tax purposes is scheduled to significantly decrease on January 1, 2026.
- Gifting shares of stock in a privately held business is an effective way to use the current lifetime exclusion or increase personal tax deductions.
- Charitable gifts are also a great way to avoid capital gains on a future sale and increase personal deductions.
- As part of the estate planning process, it’s important to have a well-documented and defensible valuation of the interests gifted.
Is your estate valued for transferring?
Several of the Tax Cuts and Jobs Act (TCJA) provisions are scheduled to sunset December 31, 2025, unless Congress extends them. One of the main provisions is the lifetime exclusion limit for estate and gift tax purposes (a.k.a. the unified tax credit).
Taxpayers use the lifetime exclusion limit as an estate planning tool to reduce the gift tax for gifting or estate tax upon passing. If the lifetime exclusion were to sunset, what will this mean for generational gifts? Absent an extension, the sunset provision could significantly impact the financial benefits of those transfers.
The TCJA was passed in December 2017, with most provisions effective starting with the 2018 tax year. Built into the law was the sunset (expiration) of certain important provisions December 31, 2025. This means on January 1, 2026, certain portions of the tax law revert to the tax law before the TCJA. Because the sunset is part of tax law, it will take an act of Congress to prevent it.
Estate and gift provisions
The TCJA made significant increases to an individual’s lifetime exclusion for estate tax purposes. The lifetime exclusion is the amount a person can give during lifetime or pass at death without being subject to gift or estate tax. The lifetime exclusion prior to the TCJA was $5.49 million. The TCJA increased it to $11.42 million in 2018. Due to annual inflationary increases, the 2023 lifetime exclusion per person is $12.92 million ($13.61 million in 2024).
A sunset would revert the lifetime exclusion amount to $5.49 million adjusted for inflation (estimated $6.4 million in 2026). It’s yet to be seen how a sunset will impact those who have given away during their lifetime more than the $5.49 million, though it’s presumed these transfers will not be impacted.
Thoughtful planning
Even though the sunset is more than two years away, it’s a good idea to start thinking about the future, as time passes quickly. Gifting shares of stock in a privately held business is an effective way to use the current lifetime exclusion or increase personal tax deductions.
- The lifetime exclusion allows business owners to give assets in excess of the annual exclusion amount without being subject to gift tax. With a decreased limit looming, it’s a great time to plan gifts in 2024 (again, assuming gifts of more than $5.49 million in 2024 or 2025 won’t be impacted by the sunset).
- Charitable gifts are also a great way to avoid capital gains on a future sale and increase personal deductions. The TCJA increased the percentage of adjusted gross income limitation on cash charitable contributions to 60% from the pre-TCJA limit of 50%. If the TCJA is allowed to sunset, taxpayers’ cash charitable contributions will be limited.
How we can help
As part of the estate planning process, it’s important to have a well-documented and defensible valuation of the interests gifted. CLA’s valuation group consists of credentialled and experienced valuators who focus solely on valuing organizations like yours and can shed light on current and future risk areas and growth opportunities within your industry.
This article only focuses on some upcoming TCJA changes; consult your CPA on the full impact. If you would like to have preliminary conversations about this possible law change, please reach out to us.