Changes to lifetime tax-exemption totals
The lifetime exemption for federal estate, gift and generation-skipping transfer (GST) tax has increased for 2020, to $11.58 million per person. When you’re doing advanced estate planning — when you’re making transfers above the $15,000 annual exclusion for gifts — that is your lifetime gift/estate tax exemption. And it’s a good time to do it soon before the exclusion is set to go back down in 2025.
A married couple now has a total of $23.16 million they can transfer free of federal estate/gift taxes, either during life or upon death. If a U.S. estate tax return is filed properly within nine months after the death of the first to die of a married couple, to elect “portability,” then the unused exemption of the first spouse can be used by the estate of the surviving spouse.
Absent intervening legislation, the Federal exemption amount will be increased for inflation each year until January 1, 2026, when it will return to $5 million (adjusted for inflation). IRS regulations now provide that individuals who use the increased federal exemption amount for lifetime gifts will not be adversely affected by a decreased federal estate tax exemption after 2025. They have indicated that there will be no “clawback” if the exemption amount in the year of death is lower than the amount of exemption used during life.
Annual gift tax exclusions are available in addition to the federal gift tax exemption. Each year any person may make gifts of $15,000 (or $30,000 for married couples) to an unlimited number of recipients without using up any part of their federal gift tax exemption.
The New York estate tax exclusion for 2020 is $5.85 million, scheduled to increase annually for inflation. The benefit of the exclusion is “phased out” for taxable estates between 100% and 105% of the exclusion amount, and eliminated entirely for taxable estates that exceed 105% of the exclusion amount. This creates a “tax cliff,” so beware! As a result of this “cliff,” if a taxable estate exceeds 105% of the exclusion amount, the entire taxable estate will be subject to the New York estate tax (applied at graduated rates).
There is no separate gift or GST tax in New York. However, taxable gifts made by a New York resident prior to December 31, 2025, and within three years of death are added back to and taxed in the resident’s estate. The right estate planning can be a benefit.
The Massachusetts estate tax exemption is only $1,000,000. This exemption is reduced by lifetime gifts in excess of the federal gift tax annual exclusion. The Massachusetts estate tax is imposed on the entire value of the estate when the exemption is exceeded, unlike the federal estate tax which only taxes the excess over the threshold. If an estate exceeds $1 million then all but $40,000 of the entire amount is taxed. However, those tax rates are much less than the 40% federal estate tax rate.
For 2020, Massachusetts estate tax rates: are 0.8% to 16%, depending on the value of the estate. The state does not tax gifts at all of any amount, nor does it have an inheritance tax.
The Connecticut estate and gift tax exemption for 2020 is $5.1 million, and will increase to $7.1 million in 2021, and $9.1 million in 2022. Beginning in 2023, the Connecticut exemption will equal the federal exemption (as adjusted for inflation). There is no separate generation-skipping tax in Connecticut.
New Jersey repealed its estate tax entirely, effective January 1, 2018. However, New Jersey has retained a separate inheritance tax, which is based on the relationship between the decedent and the beneficiary. Transfers to a spouse, child, stepchild, or grandchild of the decedent are exempt from inheritance tax. There is no separate gift or GST tax in New Jersey.