Article Authored By: Brian M. Bentrup
On January 1, 2018, the Tax Cuts and Job Act (“TCJA”) became effective. Prior to the TCJA, the federal estate tax exemption, generation-skipping transfer (“GST”) tax exemption and lifetime gift exemption were all $5,490,000. The various exemptions are combined together into what is called a “unified tax credit.” The unified tax credit exemption increase significantly from $5,490,000 in 2017 to $11,180,000 in 2018. The current exemption level for 2022 is $12,060,000 and increases each year from 2018 through 2025 after which time the provisions of the TCJA related to the unified tax credit will sunset. The exemption levels will drop to about half or just over $6,000,000 for 2026.
The unified tax credit is oddly mystifying. Most people assume that they can make gifts during their lifetimes, which will be separate and apart from the gifts they intend to make at their death. Most people also know that there is an annual limit that an individual or individuals can make. For 2022, that amount is $16,000 per person, which married couples can use to double their gifts to $32,000 for a child, for example. Most people also know that there is a limit on the amount that you can pass tax free to beneficiaries at death. While most people are aware of its existence, most don’t know the precise amount because it simply isn’t relevant to them. As indicated above, the estate tax exemption level for 2022 is $12,060,000. For the overwhelming majority of estates, it will not matter. In 2020, for example, it was estimated than less than 1% of decedent’s paid the estate tax. Nevertheless, the applicable rate for the unified tax credit on gifts or inheritances that exceed the federal exemption is 40%. This means that individuals should take appropriate precautions to protect their assets from a tax rate this high.
Many pieces of proposed legislation have targeted lowering the estate tax exemption and the lifetime gift exemption, and Congress has actively tried to eliminate the GST exemption all together. We tell clients all the time in practice that you know an estate planning tool is valuable when Congress targets it for elimination. It is indeed a very powerful tool because it allows affluent individuals the ability to fully fund a GST trust up to the unified tax credit amount for the applicable year and to file a 706 return to inform the IRS of its existence. This, in effect, marks the assets of the fully-funded GST trust “death tax paid” in the IRS database, which illustrates the true worth of the provision. The assets will “skip” through the generations without ever being taxed no matter how much the assets of the trust appreciate. At a policy level, it is not hard to see why Congress has the GST exemption in its sights given its potential for exploitation by affluent, dynastic families. From a practitioner’s perspective, it is an indispensable provision that helps disinherit the federal government.
Regardless of whether the assets are passed specifically through a GST trust established at death or while living, the unified tax credit amount is at an unusually high level. Even families means that are more modest compared to the current exemption amount would be wise to avail themselves of the current levels.
High level, sophisticated tax planning should be implemented for individuals at or near the current exemption levels. Clients are right to worry about predicting the unified tax credit amount in future years as well as potential changes in the substantive law, but practitioners are right to urge clients to plan based on existing tax laws as if they were to die tomorrow. Thus, it becomes paramount to include formulaic gifts in an estate plan so that the various tax strategies can maximize the values at the person’s date of death in the unfortunate event that the documents are not updated.
About the Author
Brian M. Bentrup is a graduate of Loyola University Chicago where he triple-majored in Economics, Political Science, and Psychology. In 2015, he obtained his law degree from The John Marshall Law School. In law school, Brian was selected to be an extern for the Honorable Laura C. Liu in the Mortgage Foreclosure and Mechanics Lien Division as well as the Illinois Tenant Union.
Brian joined Pluymert, MacDonald, Hargrove & Lee, Ltd. in January 2018. His practice includes estate planning, probate and trust administration, and residential and commercial real estate. Brian also focuses on guardianships of minors and disabled adults and has been named to the approved Guardian ad Litem lists for Cook County, DuPage County, Kane County and Lake County. Brian dedicates time to pro bono work with Chicago Volunteer Legal Services representing or advocating on behalf of minors and disabled adults.
Brian is a member of the American Bar, Illinois State Bar, Cook County Bar, DuPage County Bar, and Chicago Bar Associations. He is also a member of the Justinian Society of Lawyers and the Phi Alpha Delta Law Fraternity.
Brian is licensed to practice in Illinois and Missouri. When not practicing law, Brian enjoys spending time with his wife, daughter and son, and exploring new and different culinary experiences.