November 29, 2022
An effective and simple way to transfer a farm or other assets to the next generation is to gift those assets. When considering making a gift to your children or to others, it is important to understand the following:
For 2022, one person can give to one other person $16,000 of cash or other assets and there is generally no tax owed by anyone. This $16,000 amount is called the annual exclusion. This annual exclusion amount is tied to an index based on inflation and increases by $1,000 every few years. Due to high inflation this year, the annual exclusion will increase to $17,000 per donor per donee in 2023, even though it just increased from $15,000 to $16,000 in 2022.
If a donor desires to make a gift of more than $17,000 to one person in 2023 (or a series of gifts that total more than $17,000), then the IRS requires the donor to file a gift tax return. There is generally still no tax owed by anyone. However, the amount of a gift above the annual exclusion amount ($17,000 in 2023) reduces the donor’s estate tax exemption amount. For 2022, the estate tax exemption amount is $12.06 million. This too is tied to inflation, and in 2023 is making a large jump to $12.92 million.
For example, if a person has never made a gift that exceeded the annual exclusion during any year during his life and he dies in 2023, so long as he is not worth more than $12.92 million, his estate will not owe any estate taxes. If his estate is worth more than $12.92 million, his estate will owe federal estate tax of about 40% on the amount that is over $12.92 million. However, if he made one gift during his life that exceeded the annual exclusion by $1 million, then when he dies, he can only be worth $11.92 million in 2023 before owing estate tax.
Wisconsin currently has no inheritance or estate tax, so there would be no other estate taxes due. There could still be income taxes due, such as on a traditional IRA or 401(k).
Under current law, the estate tax exemption amount will keep increasing by inflation through 2025; however, in 2026, it will drop to approximately $7 million per person. A person has nine months from when his or her spouse dies to elect portability to add on the deceased spouse’s exemption to his or her exemption.
So, if your spouse died in 2022 and everything went to you upon your spouse’s death, you can file an estate tax return for your deceased spouse and add on $12.06 million (assuming your spouse made no prior gifts over the annual exclusion) so that if you die in 2023, you’ll have your own $12.92 million plus your spouse’s $12.06 million that you can be worth before you owe estate tax.
As mentioned, gifts can be taxable income to the recipient in certain situations. One common situation is when the donee is gifted a limited liability company or partnership interest, and such entity is a farm and the total debt of the entity exceeds the tax basis of the entity. There are a few other limited scenarios where gifts can create a tax. As always, check with your tax and legal advisers before making large gifts.
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