Transferring Generational Wealth: Don’t Let This Limited Opportunity Sunset

By Andi McNamara, CFP®
Vice President, Director of Financial Planning
Washington Trust Wealth Management

Does your estate plan take advantage of the current historically high gift and estate tax exemption? Are you taking actions while you still can that could lower your estate tax liability, before the anticipated “sunset” in 2025? Transferring wealth to future generations requires careful planning, considering both the immediate and long-term tax implications. Here are some key ideas to consider if you want to transfer the most wealth to your next generation(s).

Transferring Wealth; Now or Later
There are two primary methods of wealth transfer: gifting during your lifetime and leaving an inheritance at death. While the amount you may transfer tax-free remains the same, there are many benefits to transferring wealth during your lifetime, one of which is set to expire shortly (so don’t wait to discuss it with your wealth advisor!).

Most Gifts are Tax Free to the Recipient
First, let’s clear up some confusion about the federal tax system. A common misconception is that receiving a gift will be taxable to the recipient. In fact, the recipient does not pay federal tax on gifts-income tax or gift tax and the recipient is not required to report gifts to the IRS (unless it comes from a foreign source).ⁱ

The tax system associated with gifts is the Unified Gift and Estate Taxⁱⁱ, which is independent of income taxes. If the gift is under the taxable annual amount, there is no federal tax at all. For gifts over that amount, the gift giver, not the receiver “pays” gift tax, which is typically applied at calculation of the estate tax (Keep in mind that states have their own tax exemption regulations separate from federal tax.).

Lifetime Exemption
During your lifetime or at your death, you may transfer up to $12.92 million (as of 2023 but see Sunset of TCJA below) without incurring federal gift or estate taxes – this is your lifetime exemption (If you are married, that amount can be doubled).ⁱⁱⁱ You file a tax form notifying the IRS of gifts exceeding the Annual Gift Exclusion, even if no gift tax is due, as the IRS keeps a running tally of gifts you make. These accumulated gifts will be totaled at the time of your death and applied to the estate tax exemption amount.

Sunset of Historically High Lifetime Exemption
The Tax Cuts and Jobs Act (TCJA) of 2017 doubled the gift and estate tax lifetime exemption from $5.6 million to $11.18 million, indexed for inflation. This dramatic increase is set to expire on January 1, 2026.^iv This means that without the introduction of additional legislation, the current $12.92 million lifetime exemption will revert back or “sunset” to the 2017 level, which, when adjusted for inflation, is estimated to be close to $6.4 million.^v

You may be able to take advantage of the higher lifetime exemption amount by funding trusts and/or gifting more than the expected sunset amount of $6.4 million.^vi The amount between $6.4 million and $12.92 million will not be “clawed” or pulled back into your estate once the “excess” gift is completed, even if the lifetime exemption amount reverts to the 2017 level.^vii

Annual Gift Exclusion
If gifting more than $6,500,000 seems like too much, consider using your annual gift exclusion. You can currently gift up to $17,000 a year ($34,000 for spouses "splitting" gifts) to any number of people (family, friends, or a stranger walking down the street) without filing a gift tax return.^viii Once you give more than the annual gift tax exclusion, you need to file a gift tax return and begin to eat into your lifetime gift and estate tax exemption.

Other Gift Exclusions
You can also make unlimited payments directly to medical providers or educational institutions on behalf of others for qualified expenses without incurring a taxable gift, using any of your lifetime exemption, or affecting your $17,000 gift exclusion.^ix This is a powerful strategy that allows you to leave any existing 529 college savings plans untouched for future generations.

How Much Should You Gift?
Making large, irrevocable gifts can be one of the most impactful and frightening financial decisions you make in your lifetime. Creating a comprehensive financial plan will help you determine how much you can comfortably gift without the worry of gifting yourself into poverty. Balancing your current needs with your legacy wishes can be an enjoyable, engaging, and enlightening process with the help of your Washington Trust Financial Planning Team.

Washington Trust Wealth Management Can Help
At Washington Trust Wealth Management, we understand that transferring generational wealth involves careful consideration of tax strategies to minimize tax burdens and maximize the value passed down to beneficiaries. Whether gifting during one's lifetime or leaving an inheritance at death, it is important to consult with wealth advisors and tax professionals to tailor your wealth strategies to your specific goals and circumstances and ensure compliance with tax laws.