Matter & Substance
  November 10, 2022

Locking in Tax Savings

Because the Tax Cuts and Jobs Act (TCJA) has put estate, gift, and generation-skipping transfer (GST) tax exemptions at record-high levels, far fewer taxpayers are worrying about these taxes—but the high exemptions are only temporary. So, whether or not you’d be subject to estate taxes under the current exemptions, it’s a good idea to consider whether you can seize opportunities to potentially lock in tax savings today.

Estate Tax

While the TCJA keeps the estate tax rate at 40%, it has doubled the exemption base amount from $5 million to $10 million. The inflation-adjusted amount for 2022 is $12.06 million. Without further legislation, the estate tax exemption will return to an inflation-adjusted $5 million in 2026.

Taxpayers with estates in the roughly $6 million to $12 million range (twice that for married couples), whose estates would escape estate taxes if they were to die while the doubled exemption is in effect, still need to keep potential post-2025 estate tax liability in mind. Plus, it’s possible the exemption could be reduced sooner.

Gift Tax

The gift tax continues to follow the estate tax, so the gift tax exemption also has increased under the TCJA.

Any gift tax exemption used during your lifetime reduces the estate tax exemption available at death. Using up some of your exemption during your lifetime can be tax-smart, especially if your estate might exceed roughly $6 million (twice that if you’re married). Under the annual exclusion, you also can exclude certain gifts of up to $16,000 per recipient in 2022 ($32,000 if your spouse elects to split the gift with you or you’re giving joint or community property) without depleting any of your gift and estate tax exemption.

Each year you need to use your annual exclusion by Dec. 31. The exclusion doesn’t carry over from year to year. For example, if you don’t make an annual exclusion gift to your grandson this year, you can’t add $16,000 to your 2023 exclusion to make a $32,000 tax-free gift to him next year.


The GST tax generally applies to transfers (both during your lifetime and at death) made to people more than one generation below you, such as your grandchildren. This is in addition to any gift or estate tax due.

The GST tax exemption also has increased under the TCJA.The GST tax exemption can be a valuable tax-saving tool for taxpayers with large estates whose children also have—or may eventually have—large estates. With proper planning, they can use the exemption to make transfers to grandchildren and avoid any tax at their children’s generation.

State Taxes

Even before the TCJA, some states imposed estate tax at a lower threshold than the federal government did. Now the differences in some states are even more dramatic. To avoid unexpected tax liability or other unintended consequences, consult a tax advisor familiar with the law of your state.

Exemption Portability

If part (or all) of one spouse’s estate tax exemption is unused at that spouse’s death, the estate can elect to permit the surviving spouse to use the deceased spouse’s remaining exemption. This exemption “portability” provides flexibility at the first spouse’s death, but it has some limits. Portability is available only from the most recently deceased spouse, doesn’t apply to the GST tax exemption and isn’t recognized by many states.

And portability doesn’t protect future growth on assets from estate tax like applying the exemption to a credit shelter (or bypass) trust does. Such a trust also offers creditor and remarriage protection, GST tax planning, and possible state estate tax benefits.

So married couples should still consider these trusts—and consider transferring assets to each other as necessary to fully fund them at the first death. Transfers to a spouse (during life or at death) aren’t subject to gift or estate tax if the recipient spouse is a U.S. citizen.

Tax-Smart Giving

Giving away assets now will help reduce the size of your taxable estate. Here are some strategies for tax-smart giving:

Choose gifts wisely. Consider both estate and income tax consequences and the economic aspects of any gifts you’d like to make:

  • To minimize estate tax, gift property with the greatest future appreciation potential.

  • To minimize your beneficiary’s income tax, gift property that hasn’t appreciated significantly while you’ve owned it.

  • To minimize your own income tax, don’t gift property that’s declined in value. Instead, consider selling the property so you can take the tax loss and then gifting the sale proceeds.

Plan gifts to grandchildren carefully. Annual exclusion gifts are generally exempt from the GST tax, so they also help you preserve your GST tax exemption for other transfers. For gifts to a grandchild that don’t qualify for the exclusion to be tax-free, you generally must apply both your GST tax exemption and your gift tax exemption.

Pay tuition and medical expenses. You may pay these expenses without the payment being treated as a taxable gift to the student or patient only if the payment is made directly to the provider.

Make gifts to charity. Donations to qualified charities aren’t subject to gift tax. They may also be eligible for an income tax deduction.

Consider “taxable” gifts. Making some gifts beyond annual exclusion gifts and using some or all your lifetime exemption can make sense if you have a large estate. These “taxable” gifts can protect transfers from gift and estate tax, even if the exemption drops in the future. They also remove the future appreciation from your estate.

You do, however, need to keep in mind your beneficiaries’ income tax. Gifted assets don’t receive the “step-up” in basis that bequeathed assets do. This means that, if beneficiaries sell assets gifted to them, their taxable capital gains will be determined based on your basis in the assets. So, their capital gains tax could be higher than if they inherited the same assets.


Trusts can provide a way to transfer assets and potentially enjoy tax savings while preserving some control over what happens to the transferred assets. For those with large estates, funding trusts now, while the gift tax exemption is high, may be particularly tax smart. Here are some types of trusts to consider:

  • A qualified personal residence trust (QPRT). It allows you to give your home to your children today — removing it from your taxable estate at a reduced gift tax cost (provided you survive the trust’s term) — while you retain the right to live in it for a specified period.

  • A grantor-retained annuity trust (GRAT). It works on the same principle as a QPRT but allows you to transfer other assets; you receive payments back from the trust for a specified period. A GST—or “dynasty”—trust. It can help you leverage both your gift and GST tax exemptions. And it can be an excellent way to potentially lock in the currently high exemptions while removing future appreciation from your estate.