No matter how wealthy you are —human nature tends to make us put off attending to important matters.  But this is no time to ignore the fact that the TCJA lifetime estate and gift tax exemption will sunset in 2025. We have another election coming up in 2024, and clients shouldn’t get comfortable with wishful thinking that maybe the sunset won’t come — since some leaders have proposed eliminating estate tax loopholes for the rich. Some of the tax planning techniques we now have available for estates and trusts may not be around when the rules sunset at the end of December 2025.

The lifetime estate and gift tax exemption for 2023 is $12,920,000. After 2025, the exemption will fall back to $5 million, adjusted for inflation, unless Congress agrees to extend the higher amount. The odds of any extension depend on which party controls the White House and Congress after the 2024 election.

Most tax-free gifts you make now won’t trigger post-2025 estate tax bills. Estates use the higher lifetime exemptions for gifts to calculate post-2025 estate taxes. So, many people who made or make big gifts from 2018 through 2025 won’t lose out on the benefit of the larger exemption amount if it drops back down in 2026.

But not all gifts would qualify. Under an IRS proposed regulation, completed gifts that are later included in the decedent’s gross estate at death would be subject to the exclusion amount in effect in the year of the donor’s death. Implicated strategies include grantor-retained income trusts and transactions involving promissory notes.

High-net-worth individuals and families should revisit their estate plan now. They will need to determine whether it makes sense to top off their lifetime gifts above the expected post-2025 exemption amount of approximately $7 million before they “lose” the excess exemption between $7 million and $12.92 million. Any difference between the current higher exemption amounts and the post-2025 reduced amounts will be lost if not used.

It is important for potentially affected individuals to work with both their financial advisor and attorney before making any substantial gifts to ensure that they have sufficient liquidity for future needs. Planning techniques, such as a Spousal Lifetime Access Trust (SLAT), can be an effective tool for estate planning because the beneficiary spouse retains access to the trust assets during life. When one spouse enjoys continued access to gifted assets, married couples retain a measure of financial security and peace of mind that allows them to consider using more exemption than would otherwise be palatable.

Other trusts that are designed with a wealth transfer strategy in place to systematically help clients in passing down assets include irrevocable trusts, but there are other more flexible alternatives to just transferring assets into an irrevocable trust to max out exemptions. Alternative ideas include:

1. Qualified personal residence trusts which erase the value of a personal residence from the total value of an estate;
2. Irrevocable life insurance trusts, which reduce the value of a policy’s death benefits within an estate;
3. Grantor-retained annuity trusts; and
4. Charitable remainder trusts that avoid capital gains taxes and provide a deduction when assets are transferred into it.

Trusts have to be properly executed before they can be funded, so waiting until late 2025 to take action is risky — it might result in a poorly designed trust that will be tough, to modify later when circumstances might change. Consider the alternative though……estates in excess of the lifetime limits may face a 40% to 45% tax on the amount above the levels in 2026; and after the end of 2025, federal individual tax rates, now topping 37%, will rise to 39.6%.

Reach Out To Us: Time is running out to begin planning for the upcoming changes to estate planning laws. 2025 seems far off but thoughtful estate planning takes time to develop and implement. If you believe you will have a taxable estate after 2025, be proactive and do not wait until closer to the deadline to discuss your situation with your TFG Financial Advisors and CPAs. Feel free to contact me, Cory Lyon, directly at 561-209-1120, with any questions regarding customized financial strategies for your personal estate as well as your business. Our goal is to assist you in making informed decisions. We believe in personalized asset management and estate planning, and I act as a fiduciary for all my clients.

TFG Financial Advisors, LLC is a registered investment advisor.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities, and past performance is not indicative of future results.  Investments involve risk and are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here.