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Estate Planning on the Horizon: Potential Changes to Tax Exemptions and Strategies

Estate Planning on the Horizon: Potential Changes to Tax Exemptions and Strategies

May 07, 2024

Potential Changes to Tax Exemptions and Strategies for the Savvy Investor

The Tax Cuts and Jobs Act (TCJA) of 2017 provided temporary relief for estate planning. A key component of the TCJA was an increase in the estate and gift tax exemption, helping individuals with substantial assets.

But now, this provision will be sunset by the end of 2025, leaving many scrambling to adjust their plans. Let’s explore the implications of the expiring exemption and offer strategies for navigating this potential tax shift.

The Current Landscape

The TCJA increased the estate and gift tax exemption from $5.49 million per person in 2017 to $13.61 million in 2024. Individuals can transfer this amount to heirs without incurring federal estate tax. Married couples can effectively double this benefit, allowing them to transfer up to $27.22 million tax-free, through spousal portability. Portability is a provision that allows a deceased spouse's unused estate tax exclusion amount to transfer to the surviving spouse.

This exemption provides a much-needed tax relief for many Americans. It simplifies estate planning and minimizes the tax burden on heirs.

The Impact of Sunsetting the TCJA

If Congress doesn’t extend then TCJA's provisions, scheduled to expire on December 31, 2025, the estate tax exemption is projected to revert to pre-TCJA levels, adjusted for inflation. Estimates suggest the exemption would drop close to $6.8 million per person.

Strategies for Proactive Planning

Individuals that may be affected should consider reviewing their estate plans. Here are some proactive strategies to consider:

  • Utilize the Current Exemption: Take advantage of the current high exemption by strategically gifting assets to heirs. This will help reduce the size of your taxable estate. The strategy, however, requires careful consideration. Consult with a qualified financial professional to help determine your optimal gifting strategy.
  • Explore the Power of Trusts: Establishing irrevocable trusts offers a multitude of benefits. These trusts can help remove assets from your taxable estate while still allowing you control over their distribution. A qualified estate planning attorney can guide you in selecting the most suitable trust for your specific needs.
  • Life Insurance as a Safety Net: Life insurance proceeds generally pass tax-free to your beneficiaries. This provides your heirs with liquidity to cover potential estate tax liabilities, ensuring your wishes are followed without them incurring any financial hardship. Again, work with a financial professional to help choose the policy that best aligns with your estate planning goals.
  • Review and Revise Existing Plans: If you already have an estate plan in place, it's a good idea to review it with a qualified financial professional. Your existing plan may need adjustments to account for the lower exemption to ensure it still reflects your current wishes.

Help is Around the Corner

With the future of the estate tax exemption uncertain, consulting with a financial professional and an estate planning attorney is a great idea. They can help you develop a strategy and proactively plan for the impact of the TCJA sunsetting at the end of 2025. Protect your assets and ensure your legacy.