Robert S. Schwartz, Esq.
We believe our regular readers know a lot about the Federal gift and estate tax system. In general, until January 1, 2026, present law imposes a 40% of asset value tax once property transfers by gift or by the laws of descent and distribution exceed a cumulative $13,610,000 of transferred property value. Of course, as well, there are the annual per donee gift tax exclusion amount ($18,000 for 2024), and the tuition and medical expenses payments exclusion amount. These matters of Congressional grace involve much smaller transfers of transfer tax value exclusion than the exemption’s millions.
We appreciate that paying 40% in transfer taxes later than sooner is ordinarily simply common sense. Mathematical models we have seen over the last three decades purporting to show transfer tax savings from paying now rather than later usually contain express or implied assumptions that are not realistic or are fantastic. Today, the law provides for the exemption amount to be cut back to approximately $6,805,000 for gifts or death transfers occurring during 2026 and thereafter.
This fact leads us to arithmetic. Gross taxable estates include in their taxable values the estate taxes to be paid by executor not later than nine months after death.
For instance, assume a taxable estate of $100,000,000 and no exemption amount left. The estate tax is $40,000,000. The value received by heirs is $60,000,000. This is nice. Watch this: the estate tax is estate taxation tax inclusive.
Turn the example to the gift tax, which is gift tax exclusive, and modify the transaction so as to make a fair comparison. A gift of $60,000,000 value draws a 40% gift tax of $24,000,000. $100,000,000, minus $60,000,000, minus $24,000,000 = $14,000,000. A 40% estate tax on $14,000,000 = $5,600,000, which leaves another $8,400,000 to heirs. This is nicer: loved ones get $68,400,000.
The transfer tax efficiency of the inclusive / exclusive arithmetic fact is magnified the larger the gifts relative to the value of the eventual estate. Depending on which of two parties controls the federal government during the next Congress, the transfer tax rate may be reset as high as 55% and the exclusion amount reset at between $3,500,000 and $6,805,000 + for 2026 et seq., if not during 2025. The magnification is greater with these possibilities as assumptions.
Many in the USA complain about the members of our biennial Congresses not being very good at arithmetic. In 1976, however, when neither party alone controlled the federal government, they noticed the inclusive / exclusive arithmetic fact and introduced some more arithmetic by adding Section 2035(b) to the Code. The provision states that if the decedent (or his spouse) made taxable gifts within 36 months of the decedent’s date of death, any of the gift tax paid by the decedent is added back to the decedent’s gross taxable estate. The effect is to eliminate the gift tax efficiency edge over the estate tax, all other facts like tax rates being the same. So far it’s a 36 month look back and not a lifetime look back. So far, so good.
This writing is not and should not be interpreted as the rendering of legal advice or performance of legal services to any person by Herold Law, P.A. In accordance with professional ethical rules, furthermore, Herold Law, P.A., renders legal advice and performs legal services only in the context of an attorney-client relationship entered into before rendering advice or performing services.