How to Navigate the Upcoming Estate Tax Sunset
Authored by: Bradi Dahmen, Director of Wealth Management at Cordell, Neher & Company, PLLC
The existing limits on estate taxes are set to expire by the end of 2025 unless Congress intervenes. In such a scenario, estate and gift tax exclusions will revert to pre-2017 levels, standing at $6.8 million for individuals, adjusted for inflation.
The Tax Cuts and Jobs Act (TCJA) increased the federal estate tax threshold to $25.84 million in 2023 for married couples and $12.92 million for individuals. While there might be further adjustments for inflation in 2024 and 2025, these elevated limits are temporary. Furthermore, the current 40% maximum gift and estate tax rate is poised to rise to 45%.
Although this change may not impact everyone, it holds significance for high-net-worth individuals and business owners. Those potentially affected by the sunset of estate and gift tax limits should consider the following strategies:
Asset Spend Down: Consider spending down assets before the impending change. This can reduce the size of your estate and provide personal fulfillment. Taking advantage of the current higher exemption by making gifts now is also advisable. While many individuals plan to leave gifts to heirs posthumously, making gifts during your lifetime allows assets more time for investment growth, and if gifting over the lifetime exemption, would utilize the currently lower tax bracket.
Charitable Contributions: Making charitable contributions is a dual-purpose strategy. Not only does it support causes you care about, but it also reduces the taxable size of your estate, leading to lower income taxes and avoiding capital gains taxes.
Establishing a Trust: Certain types of trusts allow for tax friendly asset transfers to heirs, but not all trusts are created equal. For most people, the gift and estate tax exemption allows for the tax-free transfer of wealth from one generation to the next. Consult with a financial advisor to determine the most suitable trust type for your needs, whether it be a charitable trust or an irrevocable trust.
Family Limited Partnerships (FLPs): FLPs provide an avenue for consolidating family assets, allowing for centralized management and potential valuation discounts, thereby reducing the overall taxable value of your estate.
Life Insurance: Life insurance policies can be utilized to provide liquidity for estate taxes, ensuring that heirs do not need to liquidate assets to cover tax liabilities. Careful planning is essential to optimize the use of insurance within your overall estate plan.
Speak with our wealth advisors: The most important thing you can do is consult your advisor or contact us if you don’t already have one. Estate planning laws are incredibly complicated, but an advisor can offer strategies and solutions to help preserve your wealth for generations.
For more information, visit our website at cnccpa.com or give us a call at (509) 663-1661, and we’ll begin helping you, your family or your business today.
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