Effective in 2012, the amounts that a U.S. citizen or resident can transfer to another individual free of estate, gift or Generation-Skipping Transfer taxes (collectively, the "transfer taxes") have been set at a base amount, which is subject to an annual adjustment for inflation.
What is the transfer tax exemption for 2020?
On November 6, 2019, the IRS announced that the 2020 transfer tax exemption amount is $11,580,000 ($10,000,000 base amount plus an inflation adjustment of $1,580,000).
The tax rate applicable to transfers above the exemption is currently 40%.
What is the gift tax annual exclusion amount for 2020?
The gift tax annual exclusion allows taxpayers to make certain gifts without eroding the taxpayer's lifetime exemption amount. The gift tax annual exclusion in 2020 remains $15,000 per done.
What payments are excluded from the annual and lifetime gift tax exemption?
A donor may exclude from his annual and lifetime gift tax exemption all gifts to his/her spouse as long as the spouse is a U.S. citizen, payments of tuition made directly to the donee's educational institution and payments for medical expenses (including medical insurance) paid directly to the donee's medical or medical insurance provider.
There is a separate gift tax annual exclusion for gifts to spouses who are not citizens of the United States: that amount is $157,000 in 2020.
Are the current high transfer tax thresholds permanent?
The Tax Cuts and Jobs Act, which was enacted in December 2017, provided that the current $10,000,000 base exemption amount for the estate, gift and Generation-Skipping Transfer taxes is effective through 2025, and reverts to the $5,000,000 base exemption amount established by the American Taxpayer Relief Act of 2012 on January 1, 2026.
How has the federal transfer tax exemption amount changed over the years?
The transfer tax exemptions (and the highest marginal transfer tax rates) have undergone several sweeping changes in the last two decades. The exemption amounts have been fully unified only since 2011.
Since 1997, the estate, gift tax and Generation-Skipping Transfer tax lifetime exemption amounts have changed as follows:
| Estate & Gift* lifetime exemption: | GST lifetime exemption: |
|
|---|---|---|
| 1997 | $600,000 | $1,000,000 |
| 1998 | $625,000 | $1,000,000 |
| 1999 | $650,000 | $1,010,000 |
| 2000 | $675,000 | $1,030,000 |
| 2001 | $675,000 | $1,060,000 |
| 2002 | $1,000,000 | $1,100,000 |
| 2003 | $1,000,000 | $1,120,000 |
| 2004–2005* | $1,500,000 | $1,500,000 |
| 2006–2008* | $2,000,000 | $2,000,000 |
| 2009* | $3,500,000 | $3,500,000 |
| 2010* | $5,000,000** | *** |
| 2011 | $5,000,000⁑ | $5,000,000 |
| 2012 | $5,120,000 | $5,120,000 |
| 2013 | $5,250,000 | $5,250,000 |
| 2014 | $5,340,000 | $5,340,000 |
| 2015 | $5,430,000 | $5,430,000 |
| 2016 | $5,450,000 | $5,450,000 |
| 2017 | $5,490,000 | $5,490,000 |
| 2018 | $11,180,000⁑⁑ | $11,180,000 |
| 2019 | $11,400,000 | $11,400,000 |
| 2020 | $11,580,000 | $11,580,000 |
| 2010* | $5,000,000** | *** |
Notes:
* Between 2002 and 2010, the lifetime exclusion for gifts was capped at $1,000,000.
**In 2010, estates had the option to choose between a "no estate tax" system that afforded limited step-up in tax cost for the decedent's assets, or a $5,000,000 federal estate tax exemption with full step-up in tax cost.
***In 2010, the GST tax exemption was $5,000,000, but the GST tax rate was 0.
⁑ The American Taxpayer Relief Act of 2012 set a base amount of $5,000,000, subject to inflation.
⁑⁑ The Tax Cuts and Jobs Act set a base amount of $10,000,000, subject to inflation; the Act provides that the base amount sunsets and reverts to prior law effective January 1, 2026.
What does this mean for you?
The changing landscape of the federal transfer taxes has led to challenges and opportunities in estate planning. In view of the recent changes and the scheduled sunsetting of the estate, gift and Generation-Skipping Transfer tax exemption amounts, please consult with your Nixon Peabody LLP attorney about your estate plan.