The federal estate tax exemption is currently nearing $14 million for each individual, which is an all-time high. However, the exemption is set to expire, or sunset, at the end of 2025 and the exemption limit will most likely be cut in half. That is a significant reduction, and it could have profound impacts on your legacy and tax liabilities. Now is the time to start planning for the changes ahead.
What are the expected changes in the federal estate tax exemption?
The federal estate tax exemption sets the threshold above which estates are subject to federal estate tax. In 2017, Congress passed the Tax Cuts and Jobs Act and one result was a significant increase to the lifetime gift and estate tax exemption. The exemption limit for 2023 is $12.92 million and for 2024, it will be $13.61 million. The 2024 limit means that your estate would not be subject to federal taxes if its value were $13.61 million or less.
But this will change, based on current law. Current exemption levels are set to sunset at the end of 2025, and are expected to decrease to between $7 million and $8 million. According to these figures, your estate would be subject to federal taxes if its value were in excess of $7 million. In other words, by the end of 2025, an additional $6.61 million of your estate could become subject to federal taxes. If the current value of your assets significantly exceeds $7 million or it may in the future, we advise that you reach out to us now to review planning options and strategies to take advantage of the all-time high exemption before it sunsets.
What are some strategies to help avoid greater tax exposure?
If you believe your estate might be susceptible to greater tax exposure when the current exemption limit sunsets, you might want to consider taking advantage of the larger exemption limit that is now in place. Please note that the details on how to accomplish this will vary between individuals and their particular circumstances. With that said, however, there are a few common strategies to keep in mind. These include:
- Gifting strategies – One option is to make large gifts to family members before the close of 2025 (often by gifts in trust and using other entities, such as family limited liability companies). But keep in mind that your gift should be substantial if you want to take full advantage of today’s higher exemption limit. A high value gift means you should consult with an estate planning attorney or tax professional before executing a gifting strategy.
- A spousal lifetime access trust (SLAT) – In simplified terms, a SLAT is a type of irrevocable trust created by one spouse for the benefit of the other spouse during their lifetime, as well as for the benefit of other beneficiaries (typically children or grandchildren). While the donor spouse cannot directly access the trust assets, the person can indirectly benefit from the trust through distributions to the beneficiary spouse (or children or grandchildren).
- An irrevocable life insurance trust (ILIT) – With this strategy, you essentially transfer ownership of one or more of your life insurance policies to an irrevocable trust. In doing so, your life insurance policy is no longer considered part of your estate for tax purposes.
Keep in mind these are only a few strategies at your disposal and the specific strategies available to you will depend on your unique situation. This is why it is so vital to contact a tax professional or estate planning attorney to learn more.
Could this all change with a new Congress?
Following the 2024 elections, a new Congress could overturn plans to sunset portions of the Tax Cuts and Job Act. But this does not mean you should put matters on hold. If you believe you might be facing higher estate taxes if the sun sets at the end of 2025, we strongly recommend you start exploring tax saving options now. You can maximize the full benefit of any tax savings strategy by planning ahead.
Questions? Contact Integrated Law
The team at Integrated Law is your partner in planning for your assets—to protect both from avoidable taxes and from creditors. Please contact us to schedule a consultation.