Now is a good time to review your estate and gifting plans.
High-net-worth individuals and families who benefit from the historicallyhigh federal estate and gift tax exemption may soon see it reduced by half.Favorable increases in the estate and gift tax exemption created bythe Tax Cuts and Jobs Act of 2017 (TCJA) are scheduled to sunset at the end of 2025along with other changes the law made, including an increase in the standarddeduction and the charitable giving deduction, as well as reductions in individualincome tax rates.
With so many tax provisions scheduled to revert back to pre-TCJA levels in under two years, consider moves you might need to maketo minimize your tax burden and support your financial goals.
How the lifetime estate and gift tax exemption changed under the TCJA
The TCJA went into effect on January 1, 2018, anddoubled the estate and gift tax exemption from $5million to $10 million for individuals and $10 million to$20 million for joint filers. This exemption is indexedfor inflation, so by 2023 it had risen to $12.92 millionper person and $25.84 million per married couple.
The lifetime exemption amounts for estate andgift taxes are the same, which is why they’re discussed together. In addition to the estate and gifttax exemption amounts, you may make annual giftsup to $18,000 (per receiver) in 2024 without utilizingany of your gift tax exemption.
TThe estate tax exemption in 2024 is $13.61 millionfor individuals and $27.22 million for couples. Butbecause the TCJA sunsets on December 31, 2025,the estate tax exemption in 2026 will fall back to $5million for individuals and $10 million for couples,indexed for inflation, unless Congress acts to extendthe provisions.
If Congress doesn't take any action, the exemption for federal estate tax will be reduced by half after 2025.
How the exemption changes work
For example: A married couple with $25.84 millionin assets in 2023 gifted their child $17,000 that year.Because the gift amount didn’t exceed the gift taxexemption for 2023, they didn’t have to pay gift taxeson that gift. But they also made a second gift thatyear to their child of $25,823,000 – the remainingamount of their lifetime estate and gift tax exemption (as of 2023).
Did the couple have to pay taxes on that generoussecond gift? No. Even though the second gift is taxable, the IRS applies a credit against the gift taxbased on the total estate and gift tax exemption. Inother words, the IRS in effect says to such a couple,“You don’t need to pay now for that taxable gift;we’ll settle up with you on all your lifetime giftsand estate taxes when you die.”
Now imagine that this couple passes away in 2024.The TCJA is still in effect, and the couple’s estate endsup paying nothing in gift or estate taxes for eitherthe first or second gift because those two gifts equal$25.84 million, which is less than the 2024 lifetimegift and estate tax exemption of $27.22 million. If atthe time of their death the couple’s remaining assetsare worth $1.5 million, their estate also wouldn’tneed to pay taxes on $1.38 million of those assetsbecause they are covered under the remainder ofthe $27.22 million exemption.
But suppose this couple instead dies in Februaryof 2026, after the TCJA has ended, and Congresshasn’t acted to extend the provisions. Let’s assumethat the indexed gift and estate tax exemption for2026 is $10.4 million.
Does the expiration of the TCJA mean the couplenow has to pay taxes on the amount of their secondgift that is above $10.4 million? No. The IRS issued arule in 2019, clarifying that it won’t “claw back” giftsmade during the period when the TCJA was in effect.So the estate in 2026 can calculate its gift and estatetax exemption using the exemption under the TCJA.
The nuances of which particular year of the exemption would apply (whether 2023 or 2025) would bebest to discuss with your financial advisor. But thelarger point is this: If you act before 2026, you cantake advantage of the TCJA to lock in its higherlifetime gift and estate tax exemption even if youexpect to live long past December 31, 2025.
Gifts and other strategies
Outright gifts directly to your loved ones are not your only option for taking advantage of the high lifetime gift and estate tax exemption under the TCJA. Based on your circ*mstances and goals, you might consider several other strategies.
Gifts to an irrevocable trust
You could create an irrevocable trust with designated beneficiaries and distributions based on the terms you choose. Any gifts to this trust can take advantage of the TCJA lifetime gift and estate tax exemption.
Gift to a spousal lifetime access trust (SLAT)
If you’re concerned that giving large gifts directly toothers or to a trust might leave you too short on fundsto support yourself while you’re alive, you might wantto consider a spousal lifetime access trust (SLAT).A SLAT is created by one spouse for the benefit ofthe other spouse. Any gifts the SLAT creator putsinto the trust will be distributed to the beneficiaryspouse, who can then use those distributions for jointexpenses. You can also configure a SLAT so that itsassets pass to your descendants upon the death ofboth you and the beneficiary spouse.
Gifts the donor sponsor gives to the SLAT areexempt from tax up to the donor spouse’s availableexemption amount. In 2024, a donor could gift $13.61million without paying a gift tax.
While the donor won’t be taxed on contributionsbelow the exemption amount, the beneficiary maywell owe tax on distributions from the SLAT, asthese are treated as taxable income. And assetsdistributed to the beneficiary spouse can increasetheir estate. That increase could be subject to theestate tax or its exemption.
Establishing other types of trusts
There are many other types of trusts that might serveyour particular needs. These include dynasty trusts,irrevocable life insurance trusts, and a qualifiedpersonal residence trust. Your financial advisor canmost effectively evaluate what option or combination of options will achieve your goals.
If your gifts to your SLAT will use up your giftand estate exemption, but you also have a significant life insurance policy, an irrevocable lifeinsurance trust may be a way to prevent the lifeinsurance policy from counting as part of yourestate. That way, your beneficiaries benefit fromthe life insurance payout without being subject tohigh estate taxes.
A good time to review your estate plan
Although there’s a chance that new tax legislationmay take effect between now and 2026 that extendsor builds upon the TCJA provisions, it’s still advisablefor families to review their estate plan with theirfinancial advisor as soon as possible. Waiting untilthe latter months of 2025 might limit the strategiesavailable to you to take advantage of the TCJA estatetax exemption provision. Even if you’re confidentthat the TCJA sunset won’t affect your estate plan,it’s still important to check it regularly.
Raymond James does not provide tax or legal advice. Please discuss these matters with the appropriate professional.
