2020 Estate and Gift Tax Update
A Legal Moment

2020 Estate & Gift Tax Update

  2020 continues the recent trend of an historically large federal unified exemption amount for bequests and lifetime gift-giving, and because of this significant change from earlier years, careful review of tax planning provisions in existing estate planning documents is warranted ‒ as well as consideration of lifetime gift planning.

Estate & Gift Tax (and GST) Exemption Amount for 2020
   Two years ago, the exemption (or “exclusion”) amount for federal estate, gift, and generation-skipping tax (“GST”) was slated to increase slightly from the prior year, to $5.6 million per person for 2018.   This amount suddenly nearly doubled (to $11.18 million for 2018) when President Trump signed the Tax Cut and Jobs Act on December 22, 2017.  For 2020, with inflation adjustment, this amount increases to $11.58 million per person (up from $11.4 million in 2019), potentially offering a $23.16 million exemption for a married couple.  This is the “unified exemption amount” for the sum total of a person’s “lifetime gifts” (gifts in excess of the applicable annual exclusion amounts in effect when the gifts were made), together with the property passing to beneficiaries upon the donor’s death.  This figure also represents the current exemption amount for generating-skipping gifts (e.g., gifts to grandchildren).  Estates (and/or lifetime gifts) in excess of $11.58 million are taxed at a maximum rate of 40%.  Generation-skipping gifts in excess of $11.58 million are taxed at an additional rate of 40%.  For future years, the new law provides for continuing annual inflation increases in the exemption amounts through 2025.  On January 1, 2026, in the absence of future legislation, the exemption amounts are scheduled to revert to the 2017 levels ($5.49 million + inflation adjustment).
    One concern surrounding use of the current, high exemption amounts for lifetime gifts has been whether the IRS would try to “claw back” taxes on such gifts if a lower exemption amount ended up applying at the time of the donor’s death.  Effective as of late November 2019, IRS final regulations on this matter (IR-2019-189) definitively eliminate such concern.
    Income tax basis rules remain unchanged, with inherited property receiving a reset of basis at date-of-death value.
   North Carolina currently has no state inheritance, estate or gift tax.
Review of Estate Planning Documents for Outdated Provisions
   In contrast to the high current federal estate and gift tax exemption amount, as recently as 2008 the exemption amount was $2 million; in 2003 it was $1 million, and in 2001, it was $675,000.  This change has resulted in many outdated estate plans, and much of the tax-avoidance attention in estate planning (for estates less than the exemption amount) is shifting away from estate tax, focusing instead on income tax considerations ‒ including efforts to maximize stepped-up basis of appreciated assets and avoidance of capital gains.  In general, it is recommended that estate planning documents be reviewed on a regular basis and whenever one experiences significant life changes ‒ or changes in dispositive wishes.  It may also be important to review estate planning documents to make sure estate tax planning contained in earlier documents does not create any unnecessary income tax burden under current tax law ‒ or cause other unwanted, non-tax consequences.
Annual Exemption Gifts & Spousal Gifts
The federal annual gift exclusion amount for 2020 remains at $15,000 per donee which is the same as for 2019.  This exclusion allows an individual donor to give an unlimited number of “annual exclusion gifts,” so long as the amount of each gift does not exceed $15,000 per donee during calendar year 2020.  (Generally, married couples can give $30,000 per donee as long as certain measures are taken.)
   Annual exclusion gifts do not use up any of a person’s lifetime “unified exemption amount,” and generally no gift tax return is required.  If you make a gift in excess of $15,000 to one donee, you may still avoid paying a gift tax on the excess by filing a gift tax return (IRS Form 709), with an election to use part of your unused unified lifetime estate and gift tax exemption amount to cover the overage. 
   As in years past, a person may give an unlimited amount to his or her spouse by using the “unlimited gift tax marital deduction,” as long as the donee spouse is a U.S. citizen.  If the donee spouse is not a U.S. citizen, tax-free transfers to the non-citizen spouse are limited to a “super annual exclusion” amount, which increases to $157,000 in 2020 (up from $155,000 in 2019).  As with other gifts in excess of annual exclusion amounts, the donor spouse may still avoid tax by filing a gift tax return and electing to use his or her unused lifetime exemption amount to cover the overage.
    All annual exclusion gifts and spousal gifts must be gifts of a “present” interest as opposed to a “future” interest, and further qualifications can apply.  It is recommended that you consult your tax advisor prior to making a particular gift.
Other Tax-Free Gifting

   Gifts to qualified charities may generally be made in unlimited amounts, gift tax-free.  In addition, certain direct payments made on behalf of others are not considered “gifts,” and may be made in unlimited amounts.  These include direct payments on behalf of another person to educational institutions for tuition and to medical providers for medical care.  These payments must be made directly to the institutions or providers, however, or they will be treated as gifts to the individuals.  Because certain qualifications apply, it is recommended that you consult your tax advisor before making particular charitable gifts or payments on behalf of others.

Update Reminder
As you contemplate your gift plans for 2020 and review your current estate planning documents, consider also a review of your beneficiary designations to confirm (1) that the designations are what you think they are, (2) that they continue to conform to your current wishes; and (3) that the designations are properly coordinated with your overall estate plan.  Special care should be taken when beneficiaries are minors or are incapacitated.
    You can find a discussion of IRA and life insurance beneficiary designations in "IRA and Life Insurance Beneficiary Designations:  Time for a Tune-Up?"


Other Recent Articles
Gay Vinson is an attorney at Marshall, Roth & Gregory, PC. Her practice is concentrated in trust and estate planning and administration.
  To receive more information on this topic or to suggest topics for future editions of "A Legal Moment," feel free to contact Gay by email ( or telephone (828.281.2100). 

Or visit our firm's website.

     Other articles which may be of interest to you may be found in our Newsletter archives.

You may not rely on this content as legal advice for any specific situation, but should instead contact an attorney for specific advice.
Copyright © 2019 Marshall, Roth & Gregory, PC, All rights reserved.
Email Marketing Powered by Mailchimp