Earlier this month, the IRS announced the cost of living adjusted amount (“COLA”) of the exemption applicable to transfers in 2020 that are subject to taxes on gifts, estates and skip transfers. generation (“TPS”) (c. taxes “). The transfer tax exemption was increased by $ 180,000, from $ 11,400,000 for 2019 to $ 11,580,000 for 2020. at the time of his death and whether the portability of this unused exemption is chosen by filing a timely declaration of inheritance for the deceased spouse (portability of the GST exemption is not available).
Unlike income taxes, transfer tax rates remain the same for 2020 since they are not subject to COLA changes. Thus, 40% will always be the tax rate on taxable transfers that exceed the exemption. The annual donation tax exclusion amount will also remain the same at $ 15,000 since his COLA increases are calculated more conservatively.
The transfer tax exemption applies both to the cumulative lifetime “taxable gifts” of a person and to that person’s “taxable estate” calculated at the time of death. The 40% tax rate will be applied to the sum of the cumulative amounts of taxable donations and taxable assets of a person that exceed the exemption from transfer duties then in force. Thus, if an unmarried person (without the unused exemption of a deceased spouse) dies in 2020 with a taxable estate of $ 15,000,000 after making $ 5,000,000 in cumulative taxable gifts during the exemptions of previous years, that person’s estate tax will be $ 3,368,000. A similar calculation is used for the purposes of calculating the GST transfer tax in the case of transfers to the “transferor’s” grandchildren (and their descendants) and other persons who are equivalent to two or more generations. lower than that of the “assignor”.
The increased transfer tax exemption for next year is a reminder that now is the perfect time for wealthy people to consider reducing their transfer taxes and those of their families by making taxable donations. COLA’s current transfer fee exemption amounts are much higher than they were previously (for example, the exemption was $ 5,490,000 in 2017), but they are not expected to last indefinitely. This is because the currently written law provides that these exemptions will expire at the end of 2025, after which they will revert to the much lower COLA adjusted exemption amounts from the previous law which are less than half of what it is currently. in force. Additionally, the IRS recently announced that there would be no clawback of the tax benefit for people who took advantage of their high transfer tax exemptions between 2019 and 2025 when the amount used is. higher than the applicable exemption amounts for years after 2025. Another reason to take advantage of the high exemption amounts now is that a future Congress and President can impose higher taxes on wealth transfers by reducing the amount of exemption from transfer tax to a much lower level (eg, $ 3,500,000) and / or by increasing transfer tax rates. on amounts exceeding the exemption.
There are many ways to structure donations to take advantage of current transfer duty laws and waivers effectively. In addition to outright donations of cash and publicly traded securities, proven techniques can be used to take advantage of the transfer duty exemption and reduce taxable valuations, resulting in a larger transfer of wealth. with reduced or zero transfer rights. These include donations of fractional shares, donations of retained interest, and purchases of low-interest, value-defined installments from grantor trusts. Under the right circumstances, clients who develop and implement a plan now will save substantial transfer taxes later.