One aspect of estate planning involves devising strategies to minimize the amount paid in federal taxes out of one’s estate. At the end of 2017, the total exemption for the federal estate, gift, and generation-skipping transfer (GST) taxes doubled. This increase is currently set to expire after eight years, after which it will revert to pre-2018 levels. This provides taxpayers with a limited window of time to take advantage of the significantly higher exemption amounts. Our Los Angeles tax advisors can help you make use of this opportunity.
What Are the Estate, Gift, and GST Taxes?
The Internal Revenue Code (IRC) defines the estate tax in a rather circular fashion as a tax on “the transfer of the taxable estate of” a decedent. The gift tax is defined in a similar fashion as a tax “on the transfer of property by gift.” A highly-oversimplified definition of GST is a transfer to an individual, known as a “skip person,” who is at least two generations younger than the transferor, such as a grandchild and grandparent. The term “skip person” may also refer to a trust in which all beneficiaries are skip persons.
Tax Exemptions for 2020 and Beyond
The IRC allows for a “unified credit” against the estate tax, which also covers the gift and GST taxes. The tax reform law passed in 2017 amended the IRC to double the unified credit from $5 million to $10 million, with adjustments for inflation. The adjusted unified credit for 2020 is $11,580,000, or $23,160,000 for married couples. Those numbers will likely increase in 2021, and every year after that through 2025. The unified credit amount reverts to $5 million, adjusted for inflation, on January 1, 2026, unless Congress amends the IRC again.