Maximizing Lifetime Gift Limits Before the 2026 Shift

So, as it stands today, Chris, we have a lifetime gift limit of 13.61 million per spouse. This is the highest it’s been, you know, in history. So, essentially, if someone’s married, each spouse can pass their kids or loved ones $13.61 million each. That’s over $27 million that can go to them tax free. Anything above that, 27 million, federal taxes at 40% on it. So if someone’s passing, you know, 40 million, essentially 27, I’m just rounding it can go tax free. 13 million, we get taxed at 40%. Plus, there’s state by state taxes that may be applicable in Pennsylvania. There’s one in other states. There’s not. So bad news is, that’s the good news. It’s highest ever been. The bad news is this goes down to, in 2026, it goes down to 5 million.

When the law change, that’s going to be indexed, a lot of people think it’s going to between six to 7 million per spouse. That’s a big drop for someone. You know, let’s just say you have a business worth 30 million. And let’s just say, hypothetically, you have a business worth 30 million, and you pass it to your kids after 2026, you don’t do anything now, you die in 2026, your business is worth 30. That’s all you have. You and your spouse each have 6 million based upon the new lifetime exemption limits break down, you know, what the kids would owe in taxes. Yeah.

So they do taxes on that difference, the 30 minus the twelve. So a big portion that 18 million would be subject to 40%.

So 40% of 18 million, I mean, that’s $7.2 million of tax. And if you’re passing on a business and nothing else, most businesses aren’t liquid. You can’t just grab $7.2 million out of a business worth 30. Maybe it’s profiting a million a year or 2 million a year, but you certainly probably don’t have $7.2 million of cash saved up to pay that tax. Yeah. So, you know, a couple things to plan around this drop is one, you could start it depending on what, if you’re incorporated or not. If you’re an s corp, you could start gifting shares of your business, you know, to your kids now. And if you gift 6 million now, it’s all going to come off that 13.61 million that we have in 2024. But then if you don’t gift above that 6 million, the rest of it gets wasted.

So if you want to proactively use these high exemptions before they drop. You have to gift above what the new exclusion amount is going to be in 2026, most likely around six to 7 million. So you’d want to use as much as possible. So one way to do that would be establish again if you have a closely held small business incorporated, is you could give shares into a irrevocable trust that your kids are the beneficiaries of. If you don’t think they’re old or mature enough yet to start running the business. You could have voting shares where you maintain control of the business and then non voting shares where you give up a large percentage to utilize these gift tax.

And that just means that once you transfer the shares to the revocable trust, the gift is complete and you’ve taken advantage of that high exemption amount. The other thing you could do if you’re worried about liquidity is a lot of people will fund permanent life insurance programs that could at least cover the tax owed so the business doesn’t have to get disrupted or have to fire sell the business upon passing. So other avenues to utilize the lifetime exemption now versus later. If you have one spouse that passed, you can elect portability. On that you can go back and elect portability if you’ve already had your spouse pass, so at least you’ll have double the amount when these limits drop. But these are very high level conversations and very case by case basis.

So if you’re interested in discussing this with us, please reach out. We’re happy to help.

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