Preparing for the Sunsetting of the Current Estate Tax Exemption Amounts in 2026
In 2017, Congress passed the Tax Cuts and Jobs Act (“TCJA”) which doubled the federal estate tax exemption amount from $5.6 million per person to $11.8 million. The exemption has since increased to $13.61 million per person for 2024. However, the TCJA is set to expire at the end of 2025, unless Congress acts before then, dropping the exemption back down to near-2017 amounts of between $5 million and $7 million per person. Depending on the size of your estate, failing to take advantage of the current estate tax exemption may result in a significantly smaller estate left to your heirs.
So, how do you prepare for this?
Lifetime Gifting
An individual can gift up to $18,000 to any person, each year, without being subject to per person annually to avoid incurring a gift tax. If the person making the gift is married, the married couple can double this amount, and make joint gifts of up to $36,000 per recipient annually. For example, a married couple with three children can reduce their taxable estate by $108,000 annually if they gift $36,000 to each of their 3 kids each year. There are various other creative ways to utilize annual exclusion gifting, such as funding 529 plans for grandchildren, discretionary minor’s trusts for kids or grandkids, or irrevocable life insurance trusts for the purpose of paying life insurance premiums.
Additional ‘unlimited gifts’ are allowed to cover a child or grandchild’s school tuition and healthcare costs. These payments are not taxed so long as they are made directly to the educational institution or healthcare provider.
Spousal Lifetime Access Trusts (SLATs)
A SLAT is a type of irrevocable trust that allows one spouse to gift assets to a trust for the benefit of the other spouse and children, and removes the assets from their taxable estate. The beneficiary spouse can request income and principal distributions from the trust during their lifetime. When the beneficiary spouse passes away, the leftover remaining assets go to their children. If each spouse creates a SLAT for the benefit of the other, they can essentially avoid estate tax altogether. However, if the trusts are exactly the same and signed at the same time, the IRS will treat this as if each spouse created a reciprocal trust for themselves and the value of such trusts will not avoid estate tax. So, if the trusts are signed on different days, the application of the reciprocal trust doctrine can be avoided.
Contact us to see how we can help you put a plan in place and utilize the current TCJA exemptions!