BY: Jonathan D. Berry, J.D.
Senior Vice President
(817) 502-2931
As we exit this holiday season, I bring good tidings of great joy: The IRS is giving, through a new inflation adjustment for taxpayers (Rev. Proc 2022-38), a gift that may make investors’ 2023 a bit more merry and bright.
Many investors are aware that a limit exists on the amount of money that may be given by a single individual both in a single year and throughout their lifetime. Specifically, I am referring to the annual gift exclusion and the estate and lifetime gift tax exemption (aka the unified credit against estate tax). These two amounts (three if you include the generation-skipping transfer tax that is interwoven within these wealth taxes) have long been established through Congressional acts, and then codified by the IRS. These amounts are subject to constant change both in legislation and as adjusted for inflation.
Throughout the history of our modern estate tax, the amounts of both the lifetime exemption and annual gift exclusion have continued to increase. The first of the modern estate tax codifications was enacted in 1916 with a lifetime gift tax exemption amount of only $50,000 (in 1916 dollars). Since 2001, there have been a few significant increases in the exclusion amount. From 2001 to 2002, the exclusion increased from $675,000 to $1,000,000. In 2011, the exclusion increased to $5,000,000 per person, with an inflation-adjusted annual increase also added to the calculation. So, although Congress may not change the limit, the lifetime gift tax exemption amount can increase based upon inflation. The last major increase was enacted in 2018, doubling the lifetime gift and tax exemption amount. In 2022, the lifetime gift tax exemption amount was $12,060,000 per person. This meant that an individual could have up to $12,060,000 in their estate without incurring a tax at death or transfer. Any amount that exceeded the $12,060,000 and was transferred to a non-spouse at death would be subject to a 40% estate tax.
Why the inflation adjustment is happening
This past year, we all experienced true, unabashed inflation within the United States economy for the first time in many years. Our monetary policy and extreme growth, partnered with the global recession of 2007-08, previously kept inflationary pressure at bay. Then COVID hit, we had resulting supply chain issues, the government flooded the markets with money, and surprise: inflation.
OK, so here’s the happy ending for our real-life Hallmark movie: Since we have inflation, the government numbers for adjusting values, such as the lifetime gift tax exemption, have been adjusted. The inflation adjustment for the 2023 lifetime gift tax exemption amount has increased to $12,920,000 per individual. This is a single annual increase of $860,000 per person. No legislation, no Congressional act, no government intervention needed. This increase is a planned/required increase based on inflationary numbers.
What this means for investors
At Argent, we constantly discuss long-term goals and estate planning with all our clients. Proper planning allows for continuity of planned legacies and care for beneficiaries. But each plan is not, nor should it be, stagnant. Depending on changes within the legacy, care, tax law, or even relationship dynamics, a client’s plan may require modifications over time. This year, the government provided an inflationary gift to all individuals. Thanks to the inflation adjustment and the lifetime gift tax exemption increase of $860,000 per person, a married couple can effectively transfer $1,720,000 in assets to a trust or other planning vehicle. The long-term effect of placing a potentially highly appreciating asset outside the bounds of the estate, in combination with other planning methods, can be exponential.
This inflation adjustment is significantly larger than previous years. This year’s adjusted inflationary amount is larger than the total lifetime gift tax exemption amount prior to 2002. Just think of how you could personally allocate an additional $1,720,000 for your legacy.
Individuals are also getting a bump in the amount of money they may give on an annual basis without paying a gift tax. Each calendar year, an individual may make a gift to another non-spouse individual, up to the IRS limit, without incurring a gift tax. This annual amount has historically remained consistent for a 3- to 5-year period before being adjusted upward. The last adjustments were made in 2018 from $14,000 to $15,000, and then in 2022 to $16,000. This year we are getting another increase immediately upon the heels of the previous increase. The annual gift exclusion amount for 2023 is $17,000.
How the change affects families
What does the inflation adjustment mean for families? Let’s say you have a family of five: two parents, with three now-adult children, who previously created an irrevocable trust for the benefit of their children. The parents can now contribute an additional $1,720,000 to the trust for the benefit of their children because of the lifetime gift tax exemption increase. Additionally, the parents may contribute $34,000 per beneficiary ($17,000 for the husband and $17,000 for the spouse) to the trust under the annual exclusion gifts. Here, that means the trust would be able to receive $1,822,000 worth of assets without any individual incurring a gift or estate tax.
Inflation is not a good long-term trend for the economy and individuals within the economy. However, this spike in inflation does create new short-term planning opportunities. Whether you have already completed extensive planning, or are just in the beginning of planning, this is the perfect time to discuss this holiday gift from the government with your planning professionals.
If you’d like to discuss how these changes affect you and your estate planning, we’re glad to assist. Contact us at 877.887.8899 if you’re interested in learning more.
