Due to the COVID-19 pandemic triggering trillions of dollars worth of government stimulus spending, some economists predict that taxes will have to increase to help pay for these stimulus measures and to shore up the government’s coffers. This could mean possible changes are on the horizon for estate and gift tax exemption amounts. This, in turn, could mean a significant reduction in how much wealthy individuals and families may be able to transfer to later generations without taking a significant tax hit.

The current tax exemption amounts for federal estate, gift, and generation-skipping transfers are set at $11.58 million per individual or $23.16 million for married couples. This means that federal tax is not owed on the transfer of assets below these thresholds. These amounts are set to increase annually through 2025 before reverting back to $5.6 million (indexed for inflation) on January 1, 2026. Unfortunately, these amounts may very well be on the chopping block well before 2026. Due to the factors mentioned previously, as well as the results of the November election, lower estate and gift tax exemption amounts could be enacted as soon as next year.

Reach out to your financial advisor now to discuss how and how much to give in the event that the gift tax exemption expires earlier than 2026. Gifts can be made outright or to a trust for the benefit of a spouse or decedents. The estate and gift tax exemption may become a “use it or lose it” scenario, it is best to gift assets with the greatest likelihood of appreciation, as all future appreciation escapes estate tax.

It is important to keep in mind that even if a trust is structured so that a spouse is a beneficiary, the funds in the trust should be the last assets used. The goal is to deplete the taxable estate before looking to protected assets.

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