Create a Strategy to Protect Your Wealth with Potential Estate Tax Changes Looming

Create a Strategy to Protect Your Wealth with Potential Estate Tax Changes Looming

April 16, 2024

Without congressional action, portions of the Tax Cuts and Jobs Act (TCJA) are set to expire at the end of 2025. Many changes will come with the sunsetting of certain rules, including the possibility that federal estate and gift tax exemption levels will revert to pre-TCJA levels.

Some basics about gift and estate taxes

How are gift and estate taxes figured?1

The IRS explains how gift and estate taxes are figured here: “The Gift Tax and Estate Tax provisions apply a unified rate schedule to a person’s cumulative taxable gifts and taxable estate to arrive at a net tentative tax. Any tax due is determined after applying a credit based on an applicable exclusion amount. A key component of this exclusion is the basic exclusion amount (BEA). The credit is first applied against the gift tax as taxable gifts are made. To the extent that any credit remains at death, it is applied against the estate tax.”

For those that are frustrated with “IRS speak”,  basically, either through someone’s life or at their death, a person can transfer assets to non-spouse individuals up to the lifetime exclusion amount and not be subject to estate and gift tax. 

How did the tax reform law change gift and estate taxes?1

The tax reform law doubled the basic exclusion amount (BEA) for tax years 2018 through 2025 and adjusted the BEA for inflation. Under the tax reform law, this increase is only temporary. Thus, in 2026, the BEA is due to revert to its pre-2018 level, adjusted for inflation.

The projected inflation adjustments vary, but from a preparation standpoint, using $5,490,000 for individuals and $10,980,000 for married couples as the exclusion amounts is one approach.

How might estate taxes change?1

Currently, you are subject to federal estate tax only if your individual estate is worth more than $13,610,000 for individuals or $27,220,000 for married couples. These levels are more than double those of pre-TCJA estate exemptions ($5,490,000 for individuals and $10,980,000 for married couples).

If estate exceptions revert to pre-TCJA levels when portions of the TCJA expire at the end of 2025, more individuals and couples may be subject to federal estate tax when they pass away because the pre-TCJA exemptions are so much lower. If these potential changes may put you or your estate in situation where estate taxes or giftare owed, it may be time to start thinking ahead about your overall estate strategy.

Estate strategies to lower taxes going forward:

Assuming that exemptions will fall back to where they were, it may be time to think about how these lower levels might impact your existing financial and estate strategy and consider making adjustments to reflect the new limits.

Gifting

For 2024, the annual gift tax exclusion allows you to give up to $18,000 per year (or up to $36,000 if you’re married and filing jointly) per recipient without it counting toward your lifetime gift tax exemption or affecting your estate tax. Additionally, there is no limit to the number of people you can gift in a single year. This means that you could gift $18,000 (or $36,000 as a married couple) to each of your children, each of your grandchildren, or any other individual without reducing your available exemption. This is a yearly “use it or lose it” allowance.

Amounts over that per-recipient limit will count toward your lifetime gift and estate tax exclusion

Furthermore, any income—or appreciation—after a gift is given will no longer be part of your estate. Gifting removes any future value from your taxable estate.

Also, keep in mind that you can pay educational expenses without them counting toward annual exclusions or lifetime limits if they are paid directly to institutions.

Benefits of gifting during your lifetime:

There are several potential benefits of gifting money to your heirs during your lifetime, even if it counts against your exemption.

  • Managing Estate Tax: By gifting assets while you’re still alive, you can manage the size of your taxable estate, potentially lowering your estate tax liability.
  • Gain control over asset distribution: You can choose who receives your assets and in what amounts.
  • Help heirs sooner: Your heirs can benefit from gifted assets sooner rather than later, which may help them buy a home, start a business, or pay for education.
  • Minimize potential conflict: Gifting during your lifetime can help manage potential conflict among your heirs after your death.

Strategic lifetime gifting can allow you to manage estate taxes by utilizing the available exemption amount. The key benefit is removing future appreciation from your taxable estate by gifting earlier and could be a consideration for high-net-worth individuals that are confident they have more than adequate assets to cover their own cash needs.

Using Legal Vehicles

There are various forms of trusts and partnerships that you can create to help lower your estate tax.  These range from spousal lifetime access trusts (SLATs), irrevocable life insurance trusts (ILITs), Grantor Retained Annuity Trusts (GRATs), and so on.  You’ll need to work with an estate attorney to find the right options for your situation, but the main point is that there are a variety of options out there to reduce the taxable amount.

Don’t put off discussing your estate strategy.

It’s possible that changes to gift and estate tax exemptions will require more individuals and families to reconsider their estate strategies. It’s also possible that congress actually does some work and extends or makes permanent some of the TJCA provision, which makes paying attention obviously important. 

The current estate tax rate is 40% for the amounts over the exclusion limits, so these changes can be significant for higher net worth families. If you want to explore opportunities, there are steps you can take over the next 18 months. Even if exemptions revert to their previous lower levels, you can still take steps to help manage your estate.

As financial professionals, we are here to offer guidance on your estate and work with other professionals to create an estate strategy designed for your family. Please contact us if you have any questions or want to start discussing this topic before the rules change.  And remember This article is for informational purposes only and is not intended as a replacement for real-life advice. Consult your tax, legal, and accounting professionals before modifying your tax strategy to take advantage of estate laws.

1 IRS.gov, February 2024. “Estate and Gift Tax FAQs”
2 SmartAssets.com, April 1, 2023
3 Forbes.com, February 2021