If your estate exceeds current exemption limits, proper financial and estate planning can save substantial taxes. Unfortunately, only two tax years remain to take advantage of an increased exemption limit before its benefits “sunset.”
Now is an opportune moment for retirees and others to explore various lifetime gifting strategies.
The TCJA Expiration Date
As we near 2025, the fate of the Tax Cuts and Job Act’s (TCJA) provisions related to lifetime gift tax exemption and top estate and gift tax rate remains unclear. Much will depend on complex political and economic forces, such as who holds both houses of Congress, along with any policy debate that arises around these issues.
At the end of 2025, individual tax cuts will sunset (revert to prior law). Under current inflation projections, this lifetime estate and gift tax exemption could drop as low as $7.5 million per person after 2024 without legislative intervention – creating significant challenges for families with federally taxable estates.
Engaging in estate planning may be advantageous for high-net-worth families looking to take full advantage of current exemption amounts and lower tax rates, including making gifts or moving assets to trusts that capture appreciation while taking full advantage of present exemption amounts.
An experienced Moss Adams professional can guide this process and assist you and your family in selecting an optimal strategy. We can also assess options for transferring appreciation to beneficiaries gradually over time, as well as strategies for protecting legacy value while providing ongoing income to heirs.
The Inflation-Adjusted Exemption Amount
Now that the exemption amount has reached such an elevated threshold, individuals have an ample estate planning window available until 2025 by employing leveraged gifting strategies such as trusts to reduce taxable estate and pass along more wealth to their heirs.
Inflation adjustments to estate, gift, and GST tax exemption amounts (collectively known as the “lifetime gifting exemption”) are determined using inflation rates as measured by the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics and can be found on their website.
If the Tax Cuts and Job Act (TCJA) expires as planned, its lifetime gifting exemption could return to its previous level (adjusted for inflation), potentially impacting many individuals and families. This reduction could have significant ramifications.
Though the current high exemption level enables individuals to transfer a significant amount of wealth tax-free, it’s still essential to review an individual’s plan to ensure it aligns with their goals and objectives.
Your Schwab advisor can assess your situation and identify opportunities such as trusts that protect assets from creditors and future transfer taxes like family limited partnerships and LLCs.
In addition, working closely with an attorney can maximize the benefit of current gifting exemption levels while protecting against potential declines down the line.
Lifetime Gifting Strategies
There are various strategies available for lifetime gifting that may help reduce estate tax liabilities, including:
Irrevocable Trusts: For high-net-worth and ultra-high-net-worth individuals looking to reduce their taxable estate while still controlling assets that are expected to appreciate, such as real estate or closely held business interests, irrevocable trusts offer an effective strategy.
Charitable Planning: Charitable planning offers another excellent option for HNW and UHNW individuals looking to make an impactful difference in their community while simultaneously lowering their taxable estate. Charitable contributions also can take advantage of the current higher exemption amount before it expires.
If you own any significant assets that will be passed onto loved ones in the near future, it would be prudent to take advantage of the currently elevated federal estate and gift tax exemption.
Creating and executing a sound estate planning strategy before 2025 can help secure its current level and stave off its reduction or even elimination in 2026.
Consulting a qualified estate and wealth transfer professional may help identify strategies to leverage it best and revisit your estate planning goals regularly to make sure they remain pertinent given changes in law or your family finances.
Charitable Planning
Individuals looking to reduce their taxable estate threshold or use assets for purposes other than passing them down through inheritance can consider making charitable donations an asset management strategy that serves both purposes.
Charitable giving helps the community, while simultaneously decreasing estate size – leading to lower income tax and capital gains tax rates.
Are you concerned that their estate will exceed the new lower exemption limit? An experienced estate planning attorney should work immediately with them to implement strategies such as lifetime gifting, irrevocable trusts, and taking advantage of tax-advantageous accounts to minimize potential tax liability.
A competent estate planner may help individuals reduce tax liabilities with strategies like gifting lifetime gifts to individuals of different ages as well as irrevocable trusts that mitigate potential tax liabilities.
Donations that fall under the generous charitable deduction exemption should be made as soon as possible for maximum tax efficiency and potential capital gains tax avoidance.
A donor-advised fund (DAF) offers donors a great way to donate large sums without incurring capital gains taxes by giving ownership interest directly into it and then later dispersing it to charities of choice, potentially eliminating capital gains taxes.
Now is an opportune moment to undertake financial and estate planning, given the imminent expiration of an exemption.
Individuals should work closely with a team of professionals such as an estates and trusts attorney, an accountant who specializes in personal and business valuation, and a life insurance expert to make sure their plans match their goals and objectives.
Conclusion
In conclusion, the estate tax exemption is a critical aspect of financial planning for individuals with significant assets, and its anticipated changes in 2025 underline the importance of staying informed and adapting strategies accordingly.
While the exact exemption amount for 2025 is uncertain and subject to legislative decisions, it is clear that individuals should monitor updates in tax laws to make informed decisions about their estate planning.
Staying abreast of legislative developments and seeking expert advice will empower individuals to make sound decisions that align with their financial goals and aspirations for the transfer of wealth to heirs and beneficiaries.
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