Insights

April 22, 2024

Estate Changes Are Coming: Who Really Needs to Take Action?

In Estate Planning, Wealth Strategy

When Taylor Swift wrote her song, You Need to Calm Down, she probably had no idea how relevant her song title would be when thinking about the Tax Cuts and Jobs Act of 2017 (TCJA) sunsetting on January 1, 2026. Headlines are setting off alarms and panic for many high-net-worth individuals. However, the TCJA sunset doesn’t impact as many people as one may think.

In this article we’ll review what the TCJA sunset really means, who should take action, and lay out some gifting strategies to consider.

How Does the TCJA Sunset Affect Your Estate?

When the TCJA went into effect, it doubled the estate and gift tax exclusion amount from $5.49 million in 2017 to $11.18 million. This provision applies to individuals who passed or/and made gifts from 2018 through 2025. The exclusion amount has been adjusted each subsequent year for inflation and currently stands at $13.61 million per person and $27.22 million for a married couple. At the end of 2025, this tax provision will sunset, cutting the exclusion amount back to the 2017 level (adjusted for inflation) – this new limit of ~$7M means the current exclusion amount will be cut roughly in half![1]

As a result, if you were to pass away today with an estate of $13.61 million ($27.22 million for a married couple), you would avoid paying federal estate taxes. If you pass away in 2026 with an estate of $13.61 million ($27.22 million for a married couple), your estate would be subject to taxation.

Taxpayers who die through 2025 with a taxable estate greater than the exclusion amount can be subject to a federal tax rate of up to 40%. It’s also important to remember that some states have their own estate tax as well – some estates can end up with less than 60% of the net estate assets after paying state and federal estate taxes.

Who Should Act?

The best way to capitalize on the TCJA estate and gift tax exemption limits is by making irrevocable gifts. However, this is not your sign to go out and make a ton of irrevocable gifts. The reality is that this change only impacts those individuals who will pass with estates greater than the current exemption amounts.

Determining if you should take action depends on your specific situation. Here are some example scenarios:

Individuals or families with $50 million+ estates: Jack and Mary’s estate currently sits at $50 million. They recently met with their Coldstream team to revisit their financial plan and determine if their plan would still be successful if they cut their estate down to $25 million. After reviewing the results, Jack and Mary feel confident they can maintain their current lifestyle, cover future lifetime expenses, and achieve their remaining financial goals with a lower net worth. We would recommend exploring gifting strategies to reduce the size of their estate before the TCJA sunset.

Individuals or families with $13 million+ estates: Kate sold her company a few years and is currently 40 years old. She’s debating making an irrevocable gift and feels comfortable gifting $6 million, but not the full $13 million. We would recommend she not make any irrevocable gifts because she wouldn’t be leveraging the full exemption amount.

The main theme in both examples is determining your comfort with making large irrevocable gifts. Ask yourself, “am I comfortable gifting away $13.6MM?” If the answer is yes, then it’s time to act.

What Gifting Strategies Should You Consider?

Here are a few gifting strategies you should consider when preparing for the TCJA sunset:

Outright Gifts to Family Members: Transfer stocks or other income-producing property to family members who might be in lower tax brackets.

Gifts to Kids through Irrevocable Trusts or Family LLC: Establish irrevocable trusts for your children or a Family LLC. You can set rules around the withdrawal of funds and designate a trustee to uphold said rules. You can retain control but keep the majority of shares of the LLC and gift minority shares to other family members.

Spousal Lifetime Access Trust (SLAT): By utilizing a SLAT, married couples can harness the benefits of the current exclusion limits while maintaining the ability to access funds in the trust if needed. This strategy involves the transfer of assets into an irrevocable trust for the benefit of one spouse, effectively eliminating these assets from the grantor’s estate, thereby exempting them from estate taxes. Simultaneously, the grantor retains an indirect stake in the trust assets by way of their spouses’ ability to withdraw assets for health, education, maintenance, and support.

Utilize One Spouse’s Lifetime Exemption: A married couple can choose to utilize one spouse’s complete lifetime exemption by gifting assets while preserving the other spouse’s exemption. This ensures that even after the TCJA sunset, one spouse’s exemption will still be accessible for use in 2026 if the exemption regulations change.

Are There Downsides to These Strategies?

Yes. There are unique downsides to each strategy, but the biggest downside is irrevocably giving away your assets. Once the funds are gifted or sheltered in a trust or LLC, they are no longer yours and your ability to control those funds may be limited.

If you have a significant estate well above the exclusion limit, we recommend you consult with your trusted tax, estate, and financial advisors as soon as possible. You’ll need to make gifts before the end of 2025 to take advantage of the TCJA gift and estate planning limits. Some strategies may take multiple years to execute, and estate planning attorneys will be very busy as the deadline approaches. It is important that you start planning now to be well prepared for the sunset.

[1] Source: https://itep.org/federal-estate-tax-historic-lows-2023/, https://mercercapital.com/family-business-director/navigating-the-estate-tax-horizon/, https://www.schwab.com/learn/story/countdown-gift-and-estate-tax-exemptions, IRS, Kitces

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