The 2017 tax law increased the federal combined estate and gift exclusion to $11,400,000. The means that a taxpayer may make lifetime gifts and have a taxable estate of up to $11,400,000 without paying federal gift or estate tax. Lifetime gifts reduce the estate tax exclusion dollar for dollar. For example, if a taxpayer makes lifetime taxable gifts of $10,000,000, he would have a remaining estate tax exclusion of $1,400,000. On January 1, 2016, the estate and gift tax exclusion is scheduled to decrease back to the pre-2017 level of approximately $5,600,000.
It was unclear if a taxpayer would be subject to estate tax if prior to 2026 the taxpayer made gifts that exceed $5,600,000 and the taxpayer died after January 1, 2026. On November 22 the IRS issued regulations that make clear that gifts made before 2026 that exceed $5,600,000 will not cause a taxpayer to be subject to estate tax if a taxpayer dies after January 1, 2026. For example, if a taxpayer makes lifetime taxable gifts of $10,000,000 and dies on February 1, 2026, he will not pay estate tax on $4,400,000 ($10,000,000 minus $5,600,000).
The bottom line is that the temporary increase in the federal combined estate and gift tax exclusion is truly "use it or lose it."
On November 6, the IRS issued a listing of inflation adjustments for 2020. These adjustments included (1) the estate and gift tax exemption for 2020 will be $11,580,000 and (2) the annual gift tax exclusion will remain at $15,000.
Current law requires taxpayers to take minimum distributions from their retirement accounts commencing at age 70 and 1/2. The minimum distribution is calculated using life expectancy tables. Currently, a person who takes his first minimum distribution would use a life expectancy of 27.4 years. The would result in the first minimum distribution being equal to 1/27.4 of the balance of the retirement account. The revised regulations would increase taxpayers' life expectancy. For example, the first minimum distribution would be based upon a life expectancy of 29.1 years. The result is that required minimum distributions would be reduced and taxpayers will retain larger amounts in their retirement plans to account for the possibility of living longer.
Mr. Hendel has been practicing wealth preservation planning for over thirty years.