By Howard Kaslow
Each year the federal estate and gift tax exclusion amount is adjusted to reflect cost-of-living increases. The Internal Revenue Service has announced the federal estate and gift tax exclusion amount for 2023. Because of the high level of inflation during 2022, the 2023 increase from 2022 is an unusually large annual increase.
For the estate of a decedent dying in 2023, the applicable exclusion for federal estate tax purposes is increased from the 2022 exclusion of $12,060,000 to $12,920,000. This increase also applies to an individual’s lifetime gift tax exclusion and generation-skipping transfer tax exclusion.
With proper planning, a husband and wife could transfer $25,840,000 by gifts during 2023, including generation-skipping gifts, and not have any gift tax or future estate tax liability for such transfers (assuming they had not used any portion of their gift tax exclusion in prior calendar years). Gifts that qualify for the annual exclusion (discussed below) do not use any portion of the overall gift tax exclusion, and most charitable gifts are entirely free of gift and estate tax and do not use any portion of the estate and gift tax exclusion.
Upon the death of a decedent, the federal estate tax on the decedent’s estate is computed by taking into account lifetime gifts to which the gift tax exclusion applied so that there is no duplication of the exclusion amount. If a deceased spouse does not fully use his or her estate tax exclusion amount, it is possible for the unused amount to be carried over and added to the estate and gift tax exclusion amount of the surviving spouse (if the surviving spouse has not remarried and survived a second spouse).
Current law provides that in 2026 the federal estate and gift tax exclusion amount will be reduced to the prior amount of $5,000,000, adjusted for inflation. That amount appears likely to be in the range of $6,500,000 to $7,000,000 for 2026, with possible future increases for inflation.
In addition to the overall exclusion amount discussed above, an individual can make annual exclusion gifts of $17,000 in 2023 to an unlimited number of recipients (an increase from $16,000 in 2022) as long as the gifts meet certain requirements. A gift by one spouse can be treated as having been made equally by both spouses, with the effect that their total gift to one recipient in 2023 could be $34,000. Lifetime charitable gifts (and the charitable portion of gifts to both a charity and an individual) are not subject to that limit and are free of any gift tax. In addition to the annual exclusion amount, gifts in the form of certain tuition payments and medical expense payments can be made without being subject to gift tax.
While there are numerous ways to take advantage of the estate, gift, and generation-skipping transfer tax exclusions, there frequently are very technical requirements that must be complied with to accomplish the intended result. Members of the estate planning group at AKC are skilled in assisting our clients to accomplish their gift and estate planning goals and will be happy to help you.