Why you should plan for the estate tax exemption now – It sunsets in 2026, so don’t wait

There are numerous estate planning strategies that can be implemented now that include trust structures, multi-generational planning, charitable planning, maximizing tax advantage accounts, and lifetime gifting (including annual exclusion gifting). Implementing your estate planning strategies before 2025 may be more effective in reducing your taxable estate than waiting until it’s too late. Using your estate tax exemption should be part of that plan.

Why you should act now

For 2024, the federal estate tax exemption amount is $13,610,000 per individual, which means that individual can transfer up to this amount of assets either during their lifetime or at death without paying federal gift or estate taxes. The federal estate tax rate on transfers that are over that amount is 40 percent. In addition, depending on what state the individual lives in, there may be additional transfer/inheritance taxes at the state level. (For married couples, the tax exemption is $27,220,000.)

The Tax Cuts and Jobs Act of 2017 substantially increased the federal estate tax exemption to roughly double the previous amount of $5.49 million . This law is scheduled to sunset on Dec. 31, 2025 – unless Congress acts to extend it or make it permanent. If no action is taken on the federal estate tax, the exemption amount will be reduced to an inflation adjusted $5,000,000 (from 2017). This equates to an adjusted amount of approximately $7,000,000 in 2026, which means that if an individual waits until 2026 to make a gift(s), they will only be able to give away approximately $7 million that is free from federal gift taxes. The remaining $6,610,000 that could have been given away (called the bonus exclusion amount) will be taxable at a rate of 40 percent. This amounts to a substantial $2,644,000 of potential tax savings lost for individuals, and double that amount for married couples.

Of course, no one can predict what the estate tax will be in the future, as tax laws can change at any time. However, planning now, based on what we do know, is advisable. Even if Congress extends the higher exemption limits, planning will help ensure that individuals can remove assets from their estate, and that any future appreciation and growth on those assets can be removed when they pass away . It’s also important to note that assets can be placed in certain kinds of trusts, like a Delaware Dynasty Trust, which can provide a high level of asset protection.

Our insights and guidance

The following points are some planning considerations to think about over the lifetime of your estate. As a reminder, a taxable estate includes all of one’s assets at death. This includes cash, stocks/investments, all real estate, business interests, personal property and/or family businesses. Certain life insurance proceeds may be included, depending on ownership.

• Try and make use of the bonus exclusion amount (lifetime gifts between $7,000,000 and $13,610,000). Doing so will enable you to maximize the estate planning opportunity of the increased exemption before the law sunsets, unless it’s extended. These gifts will be protected by the anti-clawback rule. Under this statute, if the federal estate tax exemption sunsets, a decedent’s exemption will be the greater of what they have previously gifted, or the current amount of what they gave.
• Consider how much you can afford to give away during your lifetime without sacrificing your lifestyle. This step is critical, because once an irrevocable gift is made, the asset no longer belongs to the individual who donated the gift.
• Think about setting up an irrevocable trust, as they are often preferred for many reasons. There are many factors, but one example is creditor protection and the fact that one can control the ultimate disposition of assets . There are many different trust structures that can be implemented and many estate planning vehicles to consider. Two of the more common types in this context are Spousal Lifetime Access Trusts and Dynasty Trusts . Gifts are also popular and can either be made directly to heirs or to trusts that are held for the benefit of heirs. As there are advantages and disadvantages to different trust structures, one should consult with an advisor to determine which strategies are appropriate for a particular situation.
• Select what type of assets are best for making irrevocable gifts with your advisor. This should be approached from a potential future appreciation standpoint, as well as a cost basis standpoint. Of course, removing assets that will rapidly appreciate in value will reduce the amount of one’s future potential taxable estate. However, keeping low basis assets in one’s taxable estate will result in the cost basis of the assets being “stepped up” to the fair market value on the date of the decedent’s death. For the most part, assets held in trust outside of a taxpayer’s taxable estate do not receive a step-up in cost basis upon death.
• See if large irrevocable transfers can be prudently made; draft and execute any necessary legal document(s); and finally transfer assets (extra time may be needed if a valuation is required for certain assets).
• Timing is everything – 2026 will be here before you know it, so organizing your financial affairs and meeting with your team of advisors early is key to ensure you have time to create, execute and fund your plan.

In closing

Estate, tax and gift strategies can be complex, and we recommend you start planning for any changes now. This is particularly important as the estate tax exemption is sunsetting next year, and there may be other changes on the horizon. If you already have an estate plan established, it would be prudent to revisit it to ensure the plan is up to date and in line with your goals and objectives. Additionally, make sure your plan is set up to help reduce taxes and maximize the amounts transferred to heirs and/or charity. Keep in mind that the next year and a half will be extremely busy for trust and estate professionals. Be sure to engage them sooner, rather than later.

Your Citizens Private Wealth Advisor* is available to discuss planning options well before the federal estate tax exemption goes away. The earlier you reach out to an advisor, the more likely you will be able to determine an appropriate estate/gifting plan specific to your needs and be able to respond to any federal tax changes.