The Sunset Is Coming. Are You Prepared?
- The current historically favorable lifetime estate and gift tax exemption is scheduled to be cut in half at the end of 2025, potentially increasing the amount of your estate that is subject to estate tax.
- Families with current and projected taxable estates may benefit from transferring assets, and their future appreciation, out of their estates sooner rather than later.
- There are many ways to structure an estate plan – understand which techniques best suit your family's circumstances.
The 2017 Tax Cuts and Jobs Act (TCJA) nearly doubled the lifetime estate and gift tax exemption from $5.6 million for individuals ($11.18 million for couples) to $11.18 million ($22.36 million for couples). For the year 2023, the exemption stands at $12.92 million per person ($25.84 million for a married couple).
Families interested in transferring wealth and leaving a legacy should keep in mind that the lifetime estate and gift tax provisions in the TCJA are scheduled to sunset, or expire, at the end of 2025. If nothing changes between now and then, at the end of 2025 the exemption will revert back to 2017 levels or about $6 million per individual and $12 million for a married couple, depending on inflation over the next few years.
While it is possible that there may be new tax legislation between now and 2026, families should be reviewing their estate plan with the understanding that the TCJA provisions could expire. Many families who decide to wait and see what happens may wind up losing the ability to save on estate taxes. Rather than being subject to whatever the tax law is at the time of your death, consider taking a proactive approach and take advantage of today’s historically favorable estate tax laws. The below chart illustrates the historically high current estate tax exemption and where it is projected to go.
Planning for Growth
Your estate plan should factor in the potential appreciation of your assets between now and 2026. A couple with a net worth of $12 million today might feel comfortable forgoing estate tax mitigation strategies now, but assuming a 6% growth rate, for example, their assets could exceed the potential $14 million threshold in 2026. By taking advantage of transferring or gifting assets now, you're using an exemption you might otherwise lose when the TCJA sunsets. The below chart quantifies the historical estate tax exemption and top estate tax rates (per person) to provide context of where exemptions and tax rates are now and where they can revert to. It wasn’t long ago that the current $12,920,000 estate tax exemption amount was just $1 million!
Chart Sources: 1. TheBalance, May 23, 2023 2. IRS.gov, 2023 3. Congress.gov, 2023 4. Congress.gov, 2022 5. Investopedia.com, February 23, 2022 6. USASpending.gov, 2022
Other Reasons to Revisit Your Plan
Even if you are confident that the TCJA sunset won't affect your strategy, it's still important to revisit your estate plan periodically. Your children may be coming of age or finding their own financial circumstances changed, while life events such as marriage, divorce, or the birth of a child or grandchild can trigger the need to change your will or the terms of your trust. You may also want to consider whether your trustees or executors are still the best choice to help accomplish your wealth transfer preferences. By having regular conversations with your financial professional and attorney, you can adapt your plans to changes in tax laws or your family's personal situation—while working to safeguard your legacy.