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Estate Tax Exemption Change is Coming (Maybe)

As we enter a new year, it is time to remind folks of there is a sunset provision that may dramatically change the estate tax.  This is because while the Tax Cuts and Jobs Act of 2017 doubled the gift and estate tax exemption, unless Congress acts before January 1, 2026, this exemption is scheduled to sunset (end) on December 31, 2025.  This may make a significant change to some folks estate planning.

Right now under current law, there is a lifetime exemption of $13 million for a single person and $26 million for a couple.  This means if the gross estate value is less than the lifetime exemption, no tax would be owed.  However, if Congress fails to act by December 31, 2025, the Federal estate tax exemption will lower to $6 or maybe $7 million per person and $12 to 14 million per couple.

If you own a business, real estate or a farm or ranch, this will likely effect your estate.  When you consider the value of a business, real estate, house, equipment, investment or savings accounts, vehicles and cattle, it does not take long to reach $6 million.

The use of marital deduction trust clauses or family limited partnerships may again become the norm for estate planning for those families with substantial assets.  These marital deduction trusts  were commonly used prior to 2001 when the Federal Estate Tax limit was $600,000.00.

Another planning tool is that you gift some of your cash into a trust that purchases a life insurance policy on you, a parent, or a grandparent. That policy is owned by the trust and at death the policy pays into the trust—at a rate of two to ten times the size of the original gift. TAX-FREE. Zero tax. Yes, not one penny to Uncle Sam. In fact, that could leave your family with enough to pay the estate tax and give generously to charities and foundations that you love as well as provide additional resources for your loved ones.

That’s a MASSIVE tax-free gift, isn’t it?

Now, even if you don’t have a $6 million estate, you may have assets that will grow enough that it makes sense to gift them out of your estate while the exemption amount is so high. Even moderate gifts can become extremely valuable inside a tax-free vehicle.

There is quite a bit of discussion currently about how to “lock in” the increased gift and estate tax exemption before the sunset.  To do this comfortably, an individual woul have to give away his or her entire remaining ecemption amount now.  Is that what he or she should be doing?  That answer depends on the level of wealth that he or she has.

You may have several options such as making annual exclusion gifts of up to $18,000 per individual to each person in 2024.  That could be $180,000, or $360,000 if made by a couple, to 10 grandchildren.  Prefunding education through 529 accounts or paying tutition on behalf of another directly to the school or other educational provider.  If paying tuition, this is limited to just tuition fees and no other educational expenses.  Other options include paying medical expenses, leveraging lifetime gifts and charitable giving.

Before sunset, review and ensure that your plans still accomplish all intended objectives.  If a taxable estate post sunset is likely, you may want to talk to a professional who can guide you and help you formulate a strategy to take advantage of this window—a window that’s getting narrower by the day. You also have to keep in mind Congress could act and prevent the sunset.  To help you get the insight and planning you need to help you take advantage of this perfect tax storm, please come and see us now, because planning can take time and there are only six and a half months left before the window is scheduled to close.

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