As part of the Tax Cuts and Jobs Act of 2017, the lifetime estate and gift tax exemption — how much money a taxpayer could give away before paying estate tax — was doubled. Before 2017, the maximum was $5 million, indexed for inflation — anything over $5.49 million was taxed at 40 percent. In 2024, the lifetime exemption for an individual is $13,610,000. However, that allowance is set to revert at the end of 2025, and, adjusted for inflation, will be somewhere around $7 million — unless Congress acts. So, those who want to take advantage of the estate tax exemption at its current level need to act now.
“Taxpayers can lock in that tax savings with planning,” says Mark Kassens, CPA, Director at Brady Ware & Company. “But the time to act is now, well before that estate tax lifetime exemption resets.”
Smart Business spoke with Kassens about strategies to take advantage of the estate and gift tax exemption as it currently stands.
How might the estate and gift tax exemption be used to protect wealth in a transfer?
There’s now an opportunity for wealthy individuals to begin transferring that wealth to the next generation by setting set up a trust that will eventually pass along income to their beneficiaries after the grantor dies, when their children reach a certain age, or when certain events outlined in the trust occur. Wealth locked away in an irrevocable trust will count toward the current estate and gift tax exemption.
For example, a spousal lifetime access trust (SLAT) provides income for the settlor’s spouse, and then provides for transfers to the remainder beneficiaries after the spouse passes. It could be advantageous for married couples with an estate tax exposure to set up a SLAT because the spouse has access to the income, the trust is treated as a grantor trust for income tax purposes, the higher lifetime exemption amount is used and the future appreciation is out of the taxable estate.
Who should act now and who shouldn’t?
Those who are over the lifetime exemption now, or will be in the next couple years through appreciation of assets or after the lifetime exemption is reduced, or who expect a major liquidity event such as through the sale of their business, could have an estate tax issue now and should plan for that by utilizing the higher ceiling before it potentially change.
However, there are tradeoffs to trusts. For example, a signed and funded irrevocable trust can’t be undone. And a spousal lifetime access trust can continue to give income access to a former spouse after divorce with the settlor paying the income tax on it if the trust isn’t drafted for that contingency.
A significant consideration in trust and estate planning is that circumstances change — beneficiaries can pass before the grantor or feelings can change about who should be the beneficiaries. And though something like a revocable trust can be changed, putting money into a revocable trust isn’t a completed gift, so those transfers don’t count toward the estate tax exemption when made. With an irrevocable trust, the grantor gives up control of the wealth, and that loss of control is enough to make it a completed gift, which counts against the estate tax lifetime exemption at the time of the transfer.
Who can help?
These decisions shouldn’t be made solely for tax purposes. That would be counterproductive and shouldn’t be the primary driving force behind a wealth transfer. However, anyone with a sizable estate needs to plan, otherwise their largest beneficiary could be the United States government. With planning, that wealth can be directed where the grantor wants it to go. There are many options available, but the key is planning. And that planning should begin soon because the professionals who are involved are in the advising and the drafting of the documents are going to have a significant backlog of work as the deadline approaches. Attorneys that are drafting these documents are already seeing this type of work pick up, and that will only increase as the cliff gets closer and closer.
Also, these decisions shouldn’t be rushed into. It involves millions of dollars and wealth potentially for generations of family members. It’s best to take the time to consider all the options and ensure the plan meets all the grantor’s objectives. Getting started now will allow time for plans to be formalized should the law sunset or be changed after December 31, 2025. ●
INSIGHTS Accounting is brought to you by Brady Ware & Company.
