Estate planning is a crucial aspect of financial management, and understanding the current laws and exemptions is essential for maximizing wealth transfer. As we approach Election Day, it is worth looking more closely at current policy and what changes might be in store for 2025.
Currently, federal law provides a lifetime exemption that allows you to gift or bequeath a certain amount of wealth without having to pay transfer tax. The Tax Cuts and Jobs Act of 2017 (TCJA), from 2018 through 2025, doubled the lifetime exemption to $10,000,000 from its previous amount of $5,000,000. This exemption is adjusted annually for inflation, and in 2024, it stands at $13,610,000 per person. This means that individuals can gift or bequeath up to $13,610,000 ($27,220,000 for couples) without incurring gift or estate tax.
However, as with many of the other individual tax benefits put in place by the TCJA, the increase is scheduled to sunset at the end of 2025, with the exemption reverting to $5 million per person (as adjusted for inflation) in 2026.
Mindful of this uncertainty, here are a few key factors to keep in mind regarding estate planning in 2024:
Benefits of Transferring Assets
Apart from the short-term availability of the larger exemption, there are additional reasons to focus on estate planning in the near term. These include the prospect of future legislation that may reduce the effectiveness of popular planning techniques, such as sales to intentionally defective grantor trusts or grantor-retained annuity trusts. Additionally, the availability of valuation discounts for gifting interests in family limited partnerships or other family-controlled entities may be curtailed. By transferring assets today, individuals can remove future appreciation and income from their estate, take advantage of non-tax benefits of trusts (such as asset protection and management), and minimize state income tax through non-grantor trusts resident in low-income tax states.
Revisit Existing Plans
Even those who have done extensive estate planning in the past should review their estate plan and see how they might make best use of any remaining exemption. For example, an individual who used all their exemption on gifts in previous years can still make additional tax-free gifts in 2024 using the inflation adjustment to the lifetime exemption. Assuming no acceleration of the sunset and moderate inflation, the lifetime exemption could decrease from approximately $14 million in 2025 to around $7 million in 2026. Making pre-sunset taxable gifts of the enhanced exemption amount can result in substantial estate tax savings.
Utilizing the Enhanced Exemption
To make the most of the enhanced lifetime exemption, individuals may consider various strategies in 2024. These include outright gifts to individuals, equalizing historic gifts to children or grandchildren, forgiveness of outstanding loans, gifts to dynasty trusts or allocation of generation-skipping transfer tax exemption to existing dynasty trusts. Additional options include gifts to new intentionally defective grantor trusts (IDGTs) in connection with subsequent sales to the trust, gifts to trusts with pre-existing sales, gifts to qualified personal residence trusts (QPRTs) and gifts to trusts that allow the grantor’s spouse to retain some access to the funds (SLATs).
The Bottom Line
Estate planning in 2024 presents unique opportunities due to the enhanced lifetime exemption. Understanding the current laws, potential changes, and benefits of proactive planning is crucial for individuals seeking to maximize wealth transfer. By taking advantage of the increased exemption and utilizing various strategies, individuals can protect their assets and pay the appropriate taxes, while ensuring a smooth transfer of wealth to future generations. It is advisable to consult with a qualified estate planning professional to tailor strategies to individual circumstances and goals.