Category Archives: Probate

Gift Tax Credits, Exclusion Amounts and “Claw Backs” of Lifetime Gifts in 2026

 

CLAWBACK OF FEDERAL ESTATE AND GIFT TAX EXEMPTION

 

On November 22, 2019, the IRS issued permanent regulations clarifying that there would be no “clawback” of large lifetime gifts. More specifically, the Tax Cuts and Jobs Act of 2017 increased the basic transfer tax exclusion amount from $5 million per person to $10 million per person, indexed for inflation.  For 2020, the inflation-adjusted basic exclusion amount is $11.58 million, meaning that an individual can gift a total of $11.58 million during lifetime or at death without paying federal gift or estate tax.  In 2026, absent a change in the law, the exclusion amount is set to revert to the original $5 million per person indexed for inflation.

There has been uncertainty as to what would happen if someone took advantage of the temporarily increased exclusion amount to avoid gift tax on transfers but then died when the exclusion amount was much lower.  Would the lifetime gifts be “clawed back” into the estate and taxed anyway in a post-2026 estate tax calculation?  The regulations issued in November provide that no such clawback will occur.  The rules allow the estate of a decedent to calculate the estate tax credit using the higher of the basic exclusion amount applicable to gifts actually made during lifetime or the basic exclusion amount applicable at death.

To the extent that you have available unused exclusion and are interested in gifting the full $11.58 million exemption currently available, please contact us sooner rather than later to take advantage of what is likely a temporarily increased exclusion. 

Estate Planning is for Everyone

Most Americans are generally aware that they need to have an estate plan, but – according to a recent nationwide survey – most still do not even have a Will. One common misconception is that there is no need for an estate plan unless the estate is large or complex. In reality, most of the reasons to plan apply to all estates, large or small. Some issues you should consider:

1. Incompetency. What if you become incompetent prior to your death? With a comprehensive estate plan, you can pick the successor manager of your affairs using a trust, power of attorney, or other tools. Without an estate plan, expensive court intervention may be required in order to appoint a fiduciary who will then be required to annually report to the court.

2. Blended Families. In any second or later marriage an estate plan is particularly important. Without a plan, children from different marriages may be treated very differently or even left out of inheritance entirely, depending on how assets are titled. With a plan, you can insure that your priorities will prevail. For example, by using a marital trust you can provide support for a surviving spouse and then, upon his or her death, direct the disposition of the assets to the children of a prior marriage.

3. Minor Children. If you have minor children, a properly drafted estate plan will allow you to nominate the guardian or guardians of your choice – the single most important estate planning step parents can take. Without an estate plan the courts will be forced to designate a guardian without the benefit of your insight or the knowledge of your preferences. In addition, your assets will be distributed to minor children at their 18th birthday unless your estate plan provides otherwise. With a plan, you can designate a trustee to manage the estate’s assets until your children reach an appropriate age that you determine.

4. Special Needs Children. If you have a child who qualifies for government benefits, those benefits may be lost if the child receives an inheritance outright. The inheritance itself may also be spent improvidently if the child does not have the capacity to manage the assets. However, a trust for such a child can hold assets so that the child will remain qualified for government benefits and have the benefit of appropriate management and distribution. Similarly, if you have a child who struggles with drug addiction, poor money management, or other negative behaviors, you can tailor a trust that meets the needs of that child – if you plan in advance.

5. Beneficiary Designations. If you have life insurance, IRAs, annuities or other assets which designate a beneficiary, your current beneficiary designation may not effectively reflect your current wishes – particularly if the beneficiary designation was made some time ago. The rules and options relating to beneficiary designations have undergone significant change in recent years and will continue to do so. Your estate plan should integrate your beneficiary designations with the overall plan for all of your assets and ensure that you and your beneficiaries can take maximum tax advantage under complex distribution rules.

6. Business Transition. If you own a business, your death may also spell the death of that business if you neglect a business transition plan. With a transition plan, you can help to ensure that the business will either be transitioned to the appropriate family members or be continued pending a sale so that its value can be preserved for your family.

7.Probate and Probate Avoidance. Without a plan, your estate will pass via intestacy, meaning, in effect, that the State of Oregon will have written your Will for you. If you plan your estate, you can decide who will manage the estate, who will inherit it, and whether various methods to avoid probate entirely are appropriate. For example, a common method of avoiding probate is the creation of a revocable trust that takes title to your assets prior to your death. During your life you serve as your own trustee. Upon your death, your successor trustee is able to manage and distribute the assets per your wishes without probate.

8.Taxes. For most estates, taxes are not a concern. However, there is an Oregon Estate Tax on estates above $1,000, 000 and a Federal Estate Tax on estates above $5,340,000 (2014 exemption, indexed annually for inflation). For both Oregon and Federal tax, a married couple can fairly easily double the amount they can leave to their heirs tax free – but only with the appropriate estate planning.

Most estates, large or small, would greatly benefit from intentional planning. At a minimum, every adult should have a Will, Power of Attorney and Advance Directive to Physicians (for medical decisions) – all of which you can obtain at a cost far lower than the cost you or your family will incur from failing to plan.