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“In this world, nothing can be said to be certain, except death and taxes.” Benjamin Franklin sure knew what he was talking about so many years ago when he uttered the infamous line. I am asked all the time how taxes can be reduced upon a person’s passing so that their loved ones don’t have to incur more than what is legally obligated in tax consequences to the government.

The good news is as of today, the federal gift and estate tax exemption amount is the highest it has ever been since this tax law was enacted in 1916.
In 2021, the exemption amount increased to $11.7 million per person; a married couple can stack this amount totaling $23.4 million without fear of Uncle Sam sending a tax bill.

I can hear your sarcastic reaction already: It’s tough to be rich!

Surprisingly, however, in the United States to be defined as “rich”, an individual must amass roughly $1.9 million. Still not too shabby. But even at $2 million you’re not at risk of incurring any estate or gift tax because your estate fails to exceed the 8-figure mark.
But, oh wait, fast forward to 2026 when the increased exemption amount is set to lapse. Not only is the amount slated to be reduced by half but shall impose a 45% tax on any gifted amount greater than $1 million, or with an estate that exceeds $3.5 million. The fear among some is that this reduction may take affect prior to the 2026 scheduled reduction.

The situation raises an important question: Should you make gifts NOW and use your current exemption or wait and risk losing it?

As a tax professional, I hear the speculation that Congress may break with history and reduce the exemption amount. If not, will they limit or ultimately remove the current estate tax savings techniques, including the annual gift exclusion? Will they repeal
the “step-up” of basis for property that transfers at death? Or will they impose a “deemed realization” of capital gains at death? Again, a problem for those inheriting or gaining wealth. Most ARENT sympathetic until it happens to them.

For instance, John dies with stock worth $100/share that he bought 30 years ago for $5 each. Currently, because of the “step-up” provision, John’s estate will not owe capital gains tax on the $95 increase in stock value. Instead, the shares pass into his estate at their full market value of $100 each. Heirs who receive the shares then have a cost of $100 each as a starting point for measuring taxable gain when they sell. But, if we lose the “step-up”, in addition to Pennsylvania inheritance tax, there will also be a capital gains tax on the $95 growth at 43.4% (that is roughly $41.23 in tax per stock!).

Other strategies are making gifts to pay tuition or medical expenses which are each tax free. To qualify for this break, the giver must make the payment directly to the institution. Using a different strategy, givers can “bunch” five years of annual $15,000 gifts to a 529 education-savings plan, typically for children or grandchildren.

For those residing in Pennsylvania who make a gift of more than $15,000 in a year to one person does not mean that Federal gift tax will be due. If your gift to one person is more than $15,000, a simple gift tax return is filed reducing your overall lifetime exemption by the amount exceeding the $15,000 per year allowance. We have nearly $12 million to pull from so tax is typically not an issue.

But what is an issue is the fact that if you die within one year of this gift, as a Pennsylvania resident, the recipient of your gift will pay Pennsylvania inheritance tax. The tax ranges from 0%-15%. Oftentimes, federal estate tax is confused with Pennsylvania inheritance tax – Pennsylvania inheritance tax is due on EVERY ASSET PASSING FROM A DECEDENT TO A BENEFICIARY, with the exception of life insurance. Therefore, if you own a joint checking account with your child, only 50% incurs inheritance tax. If you designate a beneficiary on your IRA, inheritance tax is based on the date of death value of such account. But, federal estate tax is only for those who die whose estate exceeds that years exempt amount (roughly $12 million for a single person).

Despite the lifetime exemptions, one point you should make certain of is that should you make a gift within five (5) years of requiring to qualify for Medicaid, your gifts (if they exceed a total of $500 in a one (1) month period) will be counted against you during the qualification assessment for Medicaid. Therefore, if you intend on “gifting” assets to reduce your estate, you must be cognizant of the five (5) year lookback period that exists within Pennsylvania.

How long these “loop-holes” will be available to any of us is a crapshoot. But if you make a gift prior to the change, your “gift” is grandfathered in.

Do not attempt to reduce your estate on your own. If you require assistance, contact Conti Law and your tax, estate and elder law professionals.