Estate Tax Considerations

Back in 2017, Congress made changes to the tax code via the passage of the Tax Cuts and Jobs Act (TCJA). One of its provisions raised the Lifetime Gift Tax Exemption, the amount of assets each person can pass to heirs without estate taxation. TCJA raised the exempt amount from $5.49million to $11.18million per person. Due to inflation indexing adjustments, it has escalated to $13.62million per person in 2024.

However, certain concessions were made to get the increased limits passed by the legislature. The most worrisome is the sunset rule, which stipulates that the increased exemption amount will be halved at the end of 2025 if not extended by Congress prior. If this gets your gears turning, then part of the estate planning strategy has to do with politics. Democratic administrations will want to let it lapse on time, but Republicans will want it extended. Handicap that as you wish.

Investors don’t have to wait to die to use up their lifetime amount and using it now while the limits are high could be permanently beneficial to your family, given the 40% tax on estates.

However, locking in the TCJA benefits requires irrevocable gifting. Given the current combined limit of $27.24 million for a couple, it takes substantial assets to make permanent gifts of that size. It seems like families with $50 million would be an appropriate size to consider using the full $27 million now. However, the drop in exemption amount to roughly $12 million per couple will put significantly more families in harm’s way. Many people believe these are the problems of the super-rich and don’t consider themselves at risk. However, if not extended, the sunset on New Year’s Eve 2025 will make many people say, “Wait…what”?

Estate planning attorneys have some creative ways to address these issues. Some solutions involve Dynasty Trusts; some involve charities and traditional heirs in Charitable Lead Trusts. We have also seen clients split the difference on the gifts and maximize only one spouse’s $13.6 million available limit. Some of our clients have funded Spousal Lifetime Access Trusts, which allow some flexibility to continue using the money after the gift. SLAT trusts are tricky because they are designed to specifically maneuver around prohibitions the IRS has in place. Seek counsel from a qualified attorney.

Barring any action by an investor or Congress, a family with $14 million in assets would pay nearly a million dollars in estate taxes at the death of the second spouse which could have been reduced in some measure with some thought and planning. The time to think about these things is now.

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