The US federal lifetime gift and estate tax exemption defines the amount of non-charitable gifts that can be made by a US citizen or domiciliary individual ("US Persons") prior to incurring tax, with every non-charitable gift over the exemption potentially subjecting the donor to tax at rates up to 40%. In 2017, the Trump administration introduced the Tax Cuts and Jobs Act ("TCJA") which, temporarily doubled the US federal lifetime gift and estate tax exemption amount (also known as the unified tax credit) applicable to US Persons for tax years 2018 to 2025. The increased lifetime exemption amount provides significant savings on gift and estate tax for US-domiciled individuals.
The potential reduction of gift and estate tax exemption amount on 1 January 2026 has wide ranging implications. For individuals who may become domiciled in the US by planning to obtain a US green card or relocating to the US on a long-term basis, the need for pre-immigration planning in these scenarios are exacerbated by a lower exemption amount. On the other hand, individuals who are considering giving up US citizenship or US green cards often utilize the gift and estate tax exemption amount as a planning tool to potentially reduce their net worth or mark-to-market tax exposure before expatriation.
As of the tax year 2024, the TCJA currently stands at US$13.61 million (individual) and US$27.22 million (married couple). If this increase "sunsets", as is currently planned, then the exemption amount is set to decrease back down to pre-TCJA levels, estimated at only around US$7 million (individual) and US$14 million (married couple) for tax year 2026, depending on the inflation rate. Starting 1 January 2026, barring any new legislation, the gift and estate tax exemption would be half of its current amount. Clients should consider using some or all of their gift and estate tax exemption in 2024 or 2025.
In short: some individuals with significant assets are faced with a "use-it-or-lose-it" scenario and should consider taking advantage of gift and estate tax planning opportunities from the increased exemption amount prior to its sunset in 2026. One straightforward planning tool is to make a gift up to the increased exemption amount into an irrevocable trust, which then removes the assets gifted and their future growth from the individual's taxable estate. Besides this, depending on the individual's net worth and estate planning goals, there are a multitude of other options to consider.
To discuss the gift and estate tax planning opportunities please reach out to one of our Attorneys below.