As of early September, it appears the proposed transfer tax might not happen, but major changes to the gift tax could occur.
Let’s key in on the annual exclusion. In 2021 you can give away $11.7 million and not owe gift tax. You can give up to $15,000 to as many persons as you want and not have to file a gift tax return (Form 709). If you go over this amount for any person, you are required to file a gift tax return, but will owe no tax until you give away taxable gifts at least equal to the lifetime exemption amount.
Let’s say you give $115,000 to one person, which requires a Form 709, but you will not owe any gift tax. Rather, $15,000 is exempted, the remaining $100,000 simply reduces your lifetime exemption from $11.7 million to $11.6 million.
This is the current law. Now, let’s look at some of the changes that could occur by the end of the year.
1. Decoupling the lifetime estate and gift exemption. This is getting a lot of chatter. Under current rules, any gifts made during a lifetime simply reduces the amount available at death. Decoupling these exemptions might create more tax in your estate if you do not use the full gift tax exemption amount. It appears many want the gift exemption to be $1 million and the estate exemption to be $3.5 million.
2. A limit on annual gifts that can be exempted. It appears cash or outright gifts may still qualify for the $15,000 per donee exemption. However, gifts made to a trust or gifts of pass-through entities will be limited to $30,000 per donor (indexed to inflation). This severely curtails the ability to make annual gifts for many farm couples.
3. Elimination of discounts between related parties, especially the minority discount. It appears the discount for lack of marketability might remain, but the minority discount will be eliminated for related party transfers. This will result in additional value being reported on Form 709 or 706 (estate tax return).
Even though the transfer tax might not happen, it is likely we will see major changes in gift taxes. It is important to understand how the current rules work and how they might change. Visit with your CPA now to assess options.
Paul Neiffer is a tax principal with CLA and author of the blog, The Farm CPA. He grew up on a farm in central Washington and still resides in the state.
