Robert has an estate of $12 million. In 2021, he has already made $15,000 annual exclusion gifts to each of his chosen beneficiaries. With future inflation adjustments, the exemption might be enough to protect his entire estate.

But he’s in good health and believes he’ll live beyond 2025. He also thinks that the exemption might be reduced sooner. So he’s concerned about having substantial estate tax exposure, especially considering that his assets likely will continue to appreciate.

His tax advisor suggests that he make some gifts beyond the annual exclusion this year. Robert uses $6 million of his gift tax exemption to make additional “taxable” gifts. Therefore, his estate can’t use that amount as an exemption. But he protects at least $6 million from gift and estate tax, even if the exemption drops below $6 million during his lifetime.

He also removes the future appreciation from his estate. If the assets, say, double in value before Robert’s death, the gift will essentially have removed $12 million from his estate. This amount escapes the estate tax.

He does, however, need to keep in mind his beneficiaries’ income tax. Gifted assets don’t receive the “step-up” in basis that bequeathed assets do. This means that, if beneficiaries sell the assets, their taxable capital gains will be determined based on Robert’s basis in the assets. So their capital gains tax could be higher than if they inherited the assets. But there also have been proposals to change the rules regarding when gains on transferred appreciated assets are taxed.

If you, or someone you know, are similar to Robert and need guidance, contact us to schedule a meeting with an Iannuzzi Manetta tax professional.