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Plan Now for Lower Estate Tax Exemption in the Future by Sarah Gaymon, CPA

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Posted on March 25, 2024 by Sarah Gaymon

The passage of the Tax Cuts and Jobs Act in 2017 (TCJA) brought a series of welcome tax breaks to individuals at all income levels. However, with the law calling for many of these provisions to reset in 2026, taxpayers are running out of time to implement new strategies for maintaining tax efficiency and ensuring their estate plans continue to meet their ultimate needs and goals.

Among the law’s more generous provisions was a temporary doubling of the federal estate and gift tax exemption from $5 million in 2017 to $10 million in 2018. When accounting for inflation, an individual who passes away in 2024 can exclude up to $13,610,000 from the federal estate tax or $27,220,000 for married couples filing joint tax returns. If Congress does not amend the law before Dec. 31, 2025, the exemption will automatically reduce to an estimated $6 million on Jan. 1, 2026, exposing significantly more taxpayers to estate taxes that can be as high as 40 percent. The best way to take advantage of the current exclusion amount and protect you and your heirs from the prospect of an onerous estate tax is to begin the planning process sooner rather than later.

Anti-Clawback Regulations

In recent years, the IRS adopted anti-clawback rules that protect taxpayers from penalties, adjustments and additional tax when the basic exclusion amount at the time of death (in 2026 or later years) is lower than the generous exemption amount in place at the time they gifted away assets (in 2018 through 2025). This ensures taxpayers do not lose the intended tax benefits of their planning around the higher exclusion amount; any tax-free gifts they made between 2018 and 2025 will continue to be exempt from tax and not added back to their estates at the time of death. Yet, it is still critical that taxpayers take the time to plan now for the estate and gift tax exception changes ahead.

For example, consider a taxpayer who gifts $7 million to an estate-protected trust in 2024. If the trust earns 7 percent, the gift’s value 10 years later in 2034 can double to $14 million, translating to a savings of approximately $5.6 million in estate tax exposure. If the value of the gift doubled again in 20 years, the estate tax savings over two decades could be $11 million.

Planning Strategies

Some people are hesitant to engage in estate planning because they do not like to think of their mortality, or they are reluctant to gift away money today that they may need in the future should there be a dramatic shift in their circumstances. While this line of thinking is understandable, there are several strategies to employ that can take advantage of the higher exemption without relinquishing total access to those funds at a later date. Some examples include irrevocable, self-settled trusts, spousal lifetime access trusts (SLATs) and beneficiary defective inheritance trusts (BDITs). You may also choose to transfer minority business interests to family members, taking advantage of “lack of control” and “lack of marketability” discounts to lower the value of those gifts.

Regardless of the planning strategy or combination of strategies you select, you will also need to consider which assets to transfer out of your taxable estate. In doing so, it is essential to remember that gifting assets of equal value are not always equal. For example, a cash gift today is worth less than the gift of an asset that increases in value in the future. Therefore, you should focus your gifting strategy on high-income or highly appreciating assets while also leveraging assets that can be discounted or repackaged and discounted to lower the transfer amount.

While estate planning is a life-long process that requires constant care and attention to keep up with changing tax laws and your personal needs and goals, it is an endeavor that can yield significant benefits during your lifetime and for many generations to follow.

About the Author: Sarah Gaymon, CPA, is a director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where she works with entrepreneurs and high-net-worth families to plan for tax-efficient wealth preservation and multi-generational wealth transfers. She can be reached at the CPA firm’s West Palm Beach, Fla., office at (561) 361-2050 or info@bpbcpa.com.