We all feel the pain of getting taxed on the money we earn. But if you are wealthy enough to leave behind a large inheritance, you could end up getting taxed on that too!
Fortunately, Uncle Sam only levies this tax on the portion of your wealth that exceeds a certain amount, known as the lifetime exclusion amount (or basic exclusion amount). Unfortunately, that amount is about to get much smaller.
|Current LEA||2026 LEA|
|$12.92MM||$6.2MM (or thereabouts)|
So if you have a large chunk of change that you hope to give to someone other than the government or a nonprofit – whether now or before you die – now may be the perfect time to do so! If nothing else, it is a good time to understand what the LEA is and how it can be used.
What does the lifetime exclusion amount apply to?
Although this oversimplifies things a bit, you can think of the LEA as a kind of tax-free “bucket” that gets filled from two “streams:”
- Your estate – i.e. the total wealth you leave behind after your death;
- Monetary gifts that you make before you die – specifically those that exceed the annual exclusion amount (currently $17,000).
In short, this all means you can give/bequeath up to $12.92 million over the course of your life before any tax kicks in. Pretty cool!
But. The LEA is not normally this generous, and has been unusually high for the past few years thanks to a key provision in the Tax Cuts and Jobs Act (TCJA). That provision is due to expire after 2025, bringing the future expected LEA down to somewhere around $6.2 million.
That is still large enough to give most Americans plenty of breathing room. But many of our readers will have to take the prospect of estate and gift tax more seriously than they did under the TCJA. So if this is you, what can you do about it?
What to do about the change
There are a number of ways to circumvent this estate/gift tax problem: using trusts, retitling your assets, making charitable donations. But the simplest, and most common, is to use up your $12.92MM annual exclusion amount before it gets lowered to $6.2MM (or whatever it ends up being).
How, you ask?
Well, remember that you can use up your LEA after death through inheritance, or before death through (large) gifts to heirs. The IRS has clearly stated that if you use up your $12.92MM LEA through gifts before they lower it to $6.2MM, you will not be penalized after the change.
This strategy can still be worthwhile even if you do not make it to the $12.92MM total, by the way. If, for example, you give away only (only?) $9MM before 2026, that is still almost $3MM that the IRS cannot touch after 2026. Not bad!
A simpler option, I suppose, would be to die before 2026. But I do not recommend that.
This material is not intended and should not be construed as tax advice. Please consult with an Enrolled Agent, CPA, or attorney before implementing any of the strategies discussed herein.