The Sunset of the Gift and Estate Tax Exemption: Ways to Adapt Your Estate Plan
If you’ve been following tax laws or planning your estate, you’ve likely heard about the looming change to the federal lifetime gift and estate tax exemption. Read on to understand more about this change and potential strategies to apply now.
The Sunset Provision
Back in 2017, the Tax Cuts and Jobs Act doubled the exemption limits for estate and lifetime gift taxes, providing a significant buffer for transferring wealth. However, unless Congress acts, this increased exemption will expire on January 1, 2026. This shift could substantially impact your estate planning strategy if you are a high-net-worth individual or couple.
For 2024, the exemption is $13.61 million for individuals and $27.22 million for couples. You can give away this amount during your lifetime or as part of your estate without incurring federal estate taxes. These levels allow you to pass on significant wealth without tax implications.
Once the provision sunsets, the exemption amounts will revert to their 2017 levels, adjusted for inflation—roughly $7 million for individuals and $14 million for couples. The tax rate for estates exceeding these amounts could be as high as 40%. With such significant changes on the horizon, it’s essential to plan now to mitigate potential tax impacts.
Understanding Your Taxable Estate
Your taxable estate includes everything you own at the time of your death—cash, real estate, stocks, and other assets. Planning involves understanding how each asset will be taxed under the new laws and using strategies to minimize taxes while ensuring your legacy.
Strategies to consider include:
Direct gift: One straightforward strategy is making direct gifts of cash, securities, or other assets. These are transferred at today’s value and are tax-free for the recipient, who will also benefit from any future appreciation of the assets.
Irrevocable trust: These trusts are a common choice for transferring wealth to children or grandchildren. Unlike direct gifts, these trusts operate based on the schedule you determine, offering more control over the distributions even after you place the assets in the trust.
Spousal lifetime access trust (SLAT): A spousal lifetime access trust allows a spouse to transfer an amount up to the exemption limit into a trust from which the other spouse can benefit. This strategy helps maintain access to funds while moving wealth out of the taxable estate.
Family business reorganization: Converting a family business into an entity like a family limited partnership can help reduce estate taxes and ease the ownership transition.
Philanthropic strategies: If you’re inclined to give back, setting up vehicles such as a charitable remainder trust or donor-advised fund can be advantageous. These allow you to donate appreciated assets like stocks, receive a tax deduction, and set up a philanthropic legacy.
Irrevocable life insurance trust (ILIT): An ILIT can exclude the death benefit of a life insurance policy from your taxable estate. This means the full life insurance payout may go directly to your beneficiaries without being subject to estate taxes.
Work with Professionals
As these strategies show, planning your estate with the upcoming tax changes in mind requires careful consideration and professional guidance. Consider working with a fiduciary financial advisor and an estate planning attorney to navigate these complexities. Your team can provide personalized advice based on your financial situation and help implement strategies that suit your needs and goals.
Final Thoughts
The potential sunset of the current estate tax exemption poses challenges but also opens opportunities for strategic planning. By understanding your estate’s components and considering various planning strategies, you can help control your wealth and legacy. Now is the time to act, review your estate plan, and make adjustments while the favorable tax conditions still apply.
Schedule a complimentary, 15-minute chat with a fee-only, fiduciary financial advisor today to discuss your personal situation.
This material was written in collaboration with artificial intelligence (ChatGPT) derived from sources believed to be accurate. This information should not be construed as investment, tax, or legal advice.
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor with offices in Granite Bay and Folsom, CA, and Lehi and Logan, UT. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country’s leading professional association of fee-only financial advisors.