Preparing for the Sunset of the Current Lifetime Estate and Gift Tax Exemptions Should be Done Sooner Than Later

This means the current lifetime estate and gift tax exemption of $13.61 million (per spouse) in 2024 will likely be cut in half, pending no extension or modification is put in place. If families don’t start planning for the reset now by taking advantage of the current rules, then they may lose the ability to save on estate taxes and potentially sacrifice millions in tax-free gifting.

TCJA remains in effect only through the end of 2025. Adjusted for inflation, the single taxpayer limit would drop back to an estimated $7 million. Even though the sunset doesn’t take effect for over a year, understand that it takes a few months to complete any necessary planning and underwriting if insurance policies are a part of your planning process. Furthermore, many estate attorneys, insurance professionals, CPAs, and financial advisors anticipate the volume of legacy planning work around the sunset to increase meaningful ahead of January 2026, so it is possible that you could run into a logjam that could extend the time it takes to get any necessary documents, policies, and accounts in place to. All that to say, the time to start preparing for the change is now.

Estate & Legacy Planning Strategies to Consider Before the Sunset

When making large legacy gifts, it is important to determine whether your portfolio and liquid assets can support your desired lifestyle for the rest of your life. What assets do you need to live comfortably, while allowing for emergencies, long-term care events, family assistance needs and other considerations? Everything remaining after accounting for costs becomes a potential legacy asset, and the priority should be distributing these assets in the most efficient and tax friendly manner possible.

When choosing which assets to gift or place in a trust, you may want to favor those you expect will keep growing. When you gift assets using your lifetime gift tax exemption, the assets are transferred at today’s value, and there’s no tax to the beneficiaries. Here are a number of strategies to review with your advisor to see if they are appropriate for your situation:

• Take advantage of current gift exclusions: In 2024, the limit is $18,000 per individual. Making outright gifts now will reduce the taxable estate and can be leveraged with the purchase of life insurance held outside the estate as an effective means of wealth transfer. One option could be to leverage annual gifting into things like second to die trusts that can provide a bigger death benefit and tax efficiency.

• Utilize an irrevocable life insurance trust (ILIT): Transferring a large portion of wealth outside the estate into a trust will help reduce the estate’s tax burden. Holding life insurance inside the trust can increase the overall transfer of wealth. Also, making a significant gift now to a trust could be an effective way to exit existing methods for transferring wealth between generations, such as private split dollar arrangements.

• Charitable donations: Individuals can make periodic donations to a charity now to reduce the size of the overall estate. In addition, one can also arrange for assets to be gifted and left to the charity at death, creating an estate tax deduction down the road.

• Permanent insurance: If you have a large estate, a permanent life insurance policy’s payout can keep your heirs from having to rush to sell assets, potentially at below-market valuations. The tax bill is typically due within nine months of the estate owner's death, which can pose a burden on heirs who inherit estates with significant illiquid assets, such as art, real estate, or a business. If permanent insurance is too expensive for your plan, there are other insurance options available to you. The type and design of these plans will depend on your goals and risk tolerance.

Conclusion

Even if you believe the TCJA sunset won't affect your estate planning strategy, it's still important to revisit your estate plan periodically with your advisor. Even in situations where there is no specific action needed before 2026, you will be confident your tax and legacy planning choices have been thoughtfully considered and analyzed in a time of uncertainty about future policies. Our team is ready to assist your tax advisor and attorney to successfully maximize after-tax wealth by taking steps now to prepare for a potential sunset – while maintaining the flexibility of your overall estate plan. If you have questions or would like to discuss your personal exposure to a TCJA sunset, please feel free to reach out.

Thanks for reading.