The IRS defines gift tax to be the tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. Estate tax, as defined by the IRS, refers to the taxation of one’s right to transfer property upon their death. The word “property” is used broadly and refers to anything of potential value intended to be transferred. This can include cash, ownership interests, intangible assets, and real assets such as valuables, cars, and real estate alike.

Generally speaking, these taxes are calculated based on the fair market value of the intended property to be transferred; however, it is important to know that there are certain annual and lifetime thresholds, called exclusions, for which property can be transferred, tax-free. These exclusions are valuable mechanisms for you to transfer your wealth to the next generation.

Types of exclusions

There are two exclusion amounts to keep in mind: annual exclusion and lifetime exclusion. The annual exclusion refers to the yearly maximum dollar amount that can be gifted tax-free. There are no limitations on the number of gift recipients; however, the total dollar amount per individual cannot exceed the annual exclusion amount. The annual exclusion amount per individual for 2024 is $18,000.

A crucial point to keep in mind is that going over the annual limitation does not necessarily trigger a gift tax automatically. So long as you have not exceeded your lifetime exclusion amount, you will still be able to make the transfer tax-free.

What is a lifetime exclusion? The lifetime exclusion refers to the maximum dollar amount per individual that can be gifted, tax-free, over the course of someone’s lifetime until death. Again, there is no limitation on the number of recipients, only on the dollar amount. 

Tax Cuts and Jobs Act (TCJA): What it changed, and when those changes will expire

The TCJA increased the federal and gift tax lifetime exemption per individual from $5.490 million to $12.920 million in 2023. The TCJA also includes built-in inflationary adjustments, resulting in an increase in the lifetime exemption to $13.610 million as of Jan. 1, 2024. This means that a married couple could gift double this amount, up to $27.22 million.

The TCJA exemption is temporary and expected to sunset for good by the end of 2025. Beginning Jan. 1, 2026, the lifetime exemption amount will return to its pre-TCJA level, adjusted for inflation. As of the date of this article, current estimates place the 2026 exclusion amount at approximately $6-7 million.

Use it lose it: A practical example

With a 50% decrease in the lifetime exemption amount, there is a significant tax savings and opportunity cost at stake if you don’t act now. Let’s consider a hypothetical scenario with a gift in 2024, while the TCJA extended limitations are in place, versus a gift as of Jan. 1, 2026 after the extended limitations sunset.

In this scenario, a couple owns and operates a successful bakery together, and they’d like to pass on the rolling pin to their two children when they retire on June 30, 2024. This means that each parent is able to gift up to $13.610 million each, or $27.22 million collectively.

The couple want to gift 100% of their ownership of the bakery to their children. The bakery is valued at $30.0 million, but they took out a loan to get started. There is $3.0 million remaining on the loan, resulting in an equity value of $27.0 million for the family business. The couple is just under the lifetime exclusion threshold for 2024 and does not have to pay any taxes on the transfer of the business to their children.

Let’s say that this couple got sidetracked and waited until June 2026 and that nothing in their business has changed in the past two years (i.e., there was no growth, no loans paid back, and everything is the same as it was).

Now that it is 2026, the lifetime exclusion amount has reverted to pre-TCJA levels, and the exclusion amount per person is $7 million, for a total of $14 million for the couple.

By simply not acting soon enough to take advantage of the TCJA lifetime exclusions, they now have to foot a tax bill on a whopping $13.0 million.

With just a one-year delay, even with the TCJA exemptions in place, the growth of the business has resulted in a taxable gift $880,000. Waiting even further to 2026 results in a taxable gift of $15.5 million.

Additionally, let’s say that the couple was taking a collective distribution of 5% of equity annually. Each year of waiting is foregone distributions/income that could have gone directly to the children, tax-free, without dipping into the couple’s lifetime exemption amount.

In summary, there are three key takeaways from this exercise:

1. Couples can take advantage of double the lifetime exclusion amount from $13.610 million to $27.22 million collectively.
2. On Jan. 1, 2026, the lifetime exclusion amount will decrease from $13.610 million per person back to the pre-TCJA amount, which is expected to be $6-7 million in 2026 (approximately $6-$7M).  
3. Taking advantage of the TCJA exclusion may significantly reduce your tax liability

Now what?

Effective estate planning requires a lot of organization from you and your planning team. It can take weeks or months to fully implement a complex estate plan. The process can take even longer when you aren’t prepared for it. However, taking your planning steps in the right order can help avoid errors and smooth the way. Recommended steps – in the order in which they should occur – include: 

1. Assemble your planning advisors as soon as possible. Estate planning is a deeply personal matter and having the right team of advisors to discuss your goals and concerns is essential to success. Take time to interview your attorneys, accountants, and wealth strategists to make sure that there's a good fit both in terms of personality and risk appetite. Once you have your team assembled, make sure they are coordinated and focused on your goals. If you plan to give hard-to-value assets, this is the time to find a valuation professional.
2. Create a personal financial statement. If you don’t prepare a personal financial statement annually, your accountant can help. Your balance sheet should include all significant assets and estimated values: real estate, brokerage accounts, retirement plans, business investments, and jewelry or artwork.
3. Establish your priorities and goals. Whether you’re looking for tax optimization, charitable giving, or legacy planning, your goals and priorities should drive the planning process - not the other way around. Your priorities should be the primary discussion topic during the initial meetings with your advisors and planners.
4. Work with an estate planner to sketch out the plan. Putting the plan down in a visual flow chart allows you to review without all the technical jargon. It should summarize the proposed trusts or entities to be created, as well as the assets to be used. Most importantly, the flow chart should explain in plain English how the plan is intended to work so that you can confirm whether it meets your needs.
5. Develop the plan. Once you understand the flow chart as proposed by your estate planner and you agree with the structure, your attorney should take that chart and draft the planning documents to reflect the plan. Drafting wills and trusts require a lot of decision-making on your part: they include identifying fiduciaries and successor fiduciaries, identifying beneficiaries, determining withdrawal rights or degree of beneficial interest… the list goes on. Making all the necessary decisions can take some time so multiple rounds of discussions should build that into your timeline.
6. Get a second set of eyes. Sophisticated estate planning is vulnerable to the law of unintended consequences. Have a second reviewer conduct a qualified independent review to identify ambiguities, potential risks, inconsistencies, and areas of potential conflict between beneficiaries.  
7. Fund the trust. Once the documents have been reviewed, approved, and executed, it’s time to fund the trusts with the selected assets. This will likely involve administrative tasks, such as creating new investment accounts or assigning business interests.
8. Engage a valuation expert. Making gifts of hard-to-value assets requires appropriate support for a gift tax return. The best way to support the value of your gift is to hire a qualified valuation expert to prepare an appraisal report for gift tax purposes. This is particularly important if you are giving a fractional interest in a closely held businesses and are looking to claim discounts for a lack of control or lack of marketability. Any appraisal will establish the value of your gift as of a specific date. Ideally, the date of valuation will be the same as the date of gift, which is easy to arrange if you order the valuation right after you’ve made the gift. On the other hand, if you order the valuation before you make the gifts, you risk having that appraisal “go stale” while you are finalizing your estate plan. Ordering an updated appraisal will run up costs and may cause you to go over your budget. 
9. Report your gift to the IRS (and states if needed). You are required to report large gifts to the IRS and certain states. The initial deadline for that tax return is April 15 of the year following the year of gift. That means, if you complete your estate planning in 2024, your gift tax return will be due April 15, 2025, not in including extensions

Dive deeper into why you should act now in our webinar recording: “Sunsetting TCJA Estate and Gift Tax Exemptions: Why You Should Act Now.” 

_{Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.}