Since the enactment of the Tax Cuts and Jobs Act of 2017 (“TCJA”), the federal estate tax exemption has reached unprecedented levels. The estate tax exemption is the value of assets an individual can pass tax-free during life or at death.
Before TCJA, the estate tax exemption was set at $5,000,000, as adjusted for inflation. TCJA raised the estate tax exemption to $10,000,000, as adjusted for inflation, reaching $12,920,000 this year. For 2024, it is expected to be $13,610,000. TCJA is set to sunset at the end of 2025, meaning that the estate tax exemption amount will fall back to the pre-TCJA levels adjusted for inflation. This is particularly relevant for many families because of the opportunity to take advantage of significant tax savings.
After TCJA sunsets, the estate tax exemption is estimated between $6,000,000 – $7,000,000 with an inflation adjustment. Proactive planning can ensure that potential estate tax savings aren’t left on the table.
Lifetime giving is a great way to reduce the value of an estate and take advantage of the elevated exemption. A simple way to do this is to make direct gifts of cash or other assets directly to beneficiaries.
Lifetime giving is a great way to reduce the value of an estate and take advantage of the elevated exemption. A simple way to do this is to make direct gifts of cash or other assets. This year, each individual can make up to $17,000 of gifts to any number of individuals without gift tax liability. Any gifts in excess of the annual exclusion will utilize an individual’s estate tax exemption.
Making outright gifts might not be the best option for everyone. Gifts to trusts are a great alternative for many situations. Gifts to trusts have substantial benefits, including delegating the management of assets, creditor protection for the beneficiary, reduced rights to the assets for the beneficiary’s spouse and potentially removing the assets from the beneficiary’s estate.
Unfortunately, gifts made during life, whether outright or in trust, do not benefit from a stepped-up basis. As a result, it is prudent to carefully examine which assets you gift to and consider whether it would be more beneficial to hold on to low-basis assets to get the stepped-up basis at death. However, the stepped-up basis should be one of many considerations. It may be beneficial to remove rapidly appreciating assets to reduce the estate’s potential value.
It is likely the estate tax exemption will decrease, so it is not wise to rely on the exemption amounts remaining at these elevated levels past 2025. In addition, in the past few years, there have also been discussions regarding changes to the wealth transfer laws. Notably, some legislators favor further decreasing the estate tax exemption from the pre-TCJA level, raising the maximum estate tax rate from 40%, taxing unrealized capital gains at death, eliminating discounts on the transfer of a minority or unmarketable interest and limiting grantor trust benefits, among other strategies.
The elevated exemption provides planning opportunities for families that could benefit future generations; however, time is running out to capitalize on them. Consult a tax advisor about how you and your family can benefit from the current estate tax exemptions.
