By Alison Pyott, CFP® CPWA®

When we look out on the estate planning horizon, many financial advisors and attorneys are now considering the implications of a potential sunset of the current lifetime exclusion for gifts and estates. 

Passed in 2017, the Tax Cuts and Jobs Act (TCJA)¹ nearly doubled the current estate tax exemption amount to $12.92 million for individuals and $25.84 million million for couples.² However, lawmakers included a sunset provision that would bring the exemption amount back to pre-2018 levels on December 31st, 2025.³ It is unclear whether Congress will act to change or eliminate the sunset provision before then. If they don’t act, exemptions might decline to $7 million for individuals and $14 million for married couples and these estates could be subject to federal estate tax.⁴ The 2023 federal estate tax currently ranges from 18% to 40%.⁵

The good news is that families with estates that are likely to be affected by the change have an opportunity to act now in order to limit or avoid potential future estate tax liability.  

Actions to Consider

Families may benefit from taking action now rather than waiting to see what happens closer to the sunset date. For your consideration, we have listed a few action steps you may wish to take to reduce this potential liability. 

Charitable Giving 

Charitable giving, including qualified philanthropic donations made during your lifetime or those provided for in your estate planning documents, can help reduce your taxable estate and potential estate tax.⁶ 

Learn more: IRS Publication 526 goes into depth on the rules governing charitable contributions, including what kind of organizations are qualified to receive contributions and what types of contributions you can deduct.

Gifting

For the 2023 tax year, the annual gift exclusion is $17,000 per recipient for individuals and $34,000 per recipient for married couples.⁸ 

The IRS has made a point to announce that people who take advantage of the increased gift tax exclusion amount will not be adversely impacted after 2025.⁹ 

Gifts to individuals that are greater than the annual gift exclusion amounts are not taxable, but there are exceptions, including tuition paid directly to an educational institution or medical expenses paid to a medical institution on behalf of someone else.¹⁰ 

Learn more: IRS Publication 559 covers the rules governing gifts and exceptions. 

Setting up a Trust

Transfers can also happen through a variety of trust vehicles each with their own benefit and consideration. This includes split interest trusts which can have a dual benefit of helping your family and a charity.¹¹ 

Learn more: Speak with a knowledgeable estate planning attorney that can help identify what is most appropriate for your goals.

Consider State Level Estate Taxes as Well

When we think about estate tax, we usually focus on Federal rules. For larger estates, this is definitely a major consideration and requires appropriate planning with your estate planning attorney, wealth manager, and your CPA. However, smaller estates may have an estate tax depending on where you live. Massachusetts, Oregon, Rhode Island, Illinois, and Vermont are a few of the states that currently have an estate tax for individuals less than or equal to $5 million.¹² Six states have an inheritance tax, paid by heirs, including New Jersey and Pennsylvania.¹³

Potential Next Steps

Now is a good time to review your current assets, estate documents, and consult with your wealth manager and estate planning attorney to determine if and what actions might be appropriate for you and your family.  

It is important to review your plan periodically even if your estate is below the federal and state exemption levels. Questions you may wish to consider include: 

• Do you have the right people in place to make financial and health decisions for you? 
• Do you have a living will that outlines your wishes for end of life care? 
• Have your plans for family, friends and charitable bequests changed? 

The SECURE Act also changed tax rules for inherited retirement accounts, which could potentially negatively affect your beneficiaries. For more information on this, please see our September 2021 blog The SECURE Act New Era – Retirement & Financial Planning Reminders – Veris Wealth Partners.

Proper planning now can benefit you and those you care about.