Plans now to exclude the incredible in the downturn


The property tax exclusion is currently at an all-time high of $11.7 million. This consists of the $5 million permanent exclusion, adjusted for inflation from the 2011 base year, then doubled under the Tax Cuts and Jobs Act. However, the Tax Cuts and Jobs Act, which doubled exclusion, only doubled it Temporarily. The exclusion will return to $5 million (adjusted for inflation) after 2025. Therefore, the exclusion on January 1, 2026 is expected to be approximately $6 million. (In 2021, if you remove the doubling that is currently in effect, it will be $5.85 million.)

As we know, there are several proposals that would reduce exclusion. The “99.5% Act” would cut it to $3.5 million, effective January 1, 2022. These proposals may not pass due to the very small majorities in the House and Senate. But exclusion will decrease in 2026, even if no legislation is passed. Therefore, estate planning attorneys should advise their clients of this certainty and help them plan ways to anticipate this.

If the customer were to use their current $11.7 million exclusion, no tax would be due even when the estate tax exclusion drops. In other words, there is no “clawback”. It would be better for the customer to take advantage of complete exclusion. Suppose a customer only uses $6 million. By 2026, they would have used all the exceptions available to them at that time and would have no exception left due to the previous gift. So, just to the extent that they make in excess of $6 million, they capture some historically high exclusion.

What are the best assets to offer? Those that have an income tax basis close to their current fair market value, but whose value is expected to increase. why is that? If the client gifts the losing asset, the loss cannot usually be collected by the giftee. If the customer provides assets that have a high valuation, they will essentially lose the excess upon their death. Let’s say a client has $1 million of XYZ stock based on $50,000. If they were to sell XYZ stock today, they would pay a capital gain of $950,000, which is the difference between their basis in XYZ stock and the sale price. If they gift XYZ stock, it will have a carryover basis in the hands of the gifted. However, if they were to hold the asset until their death and it was included in their taxable property, there would be an increase in the fair market value basis. In other words, capital gains will be eliminated.

Therefore, to the extent that you can help clients gift cash or other assets with an income tax basis close to fair market value, that would be the best use to exclude them. And if customers used their full $11.7 million exclusion, they would have taken out the full doubled exclusion, whereas if they had only made a smaller amount, they would have left the exclusion on the table. They really don’t indulge in the doubling portion of exclusion until their use of exclusion exceeds what exclusion will be in 2026 and to the extent that it does.

So, help your clients plan now to capture historically high exclusion.

Stephen C. Hartnett, JD, LLM
Education Manager
American Academy of Estate Planning Lawyers, Inc.
9444 Balboa Street, Suite 300
San Diego, CA 92123
Phone: (858) 453-2128
www.aaepa.com

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