Written by: Paige Thomson & Marissa Wilkins
Estate tax is levied on the assets of an individual following their passing. The estate tax exemption refers to the amount of an individual’s estate that is not subject to tax upon their death. Therefore, when an individual passes away, only the value of their estate that exceeds the estate tax exemption becomes subject to the federal estate tax. Currently, the federal estate tax exemption is $13.61 million per person ($12.92 million in 2023), adjusted for inflation, with federal estate tax rates ranging from 18-40%.
Before the enactment of the Tax Cuts and Jobs Act (TCJA) of 2017, the estate tax exemption was $5 million. The passage of TCJA raised the exemption significantly, more than doubling it to $11.18 million in 2018, and increasing yearly to adjust for inflation. However, this increase is temporary, with the enhanced exemption set to revert on January 1, 2026, to pre-TCJA amounts (estimated to be around $7 million when adjusted for inflation). The reduced exemption will push many individuals into having taxable estates, increasing the tax liability upon death, and consequently reducing the inheritance amount for heirs.
Luckily there are things you can do now to take advantage of the enhanced exemption prior to the sunset in 2026. First things first, you should review your current estate plan. If you don’t have an estate plan, reach out to an estate planning attorney to discuss your options. When reviewing your estate plan, determine if you will have a taxable estate and if it would be advantageous for you to modify your estate plan to account for the increased exemption.
Below are a few strategies to consider when taking advantage of the temporarily increased exemption.
Gifting
The estate tax exemption can be used during your lifetime by way of lifetime gifting. Transferring assets out of your estate during your lifetime is an effective way to decrease the size of your estate upon death. You won’t pay gift tax on any gifts that are under the estate tax exemption. Further, lifetime gifting allows for you to take advantage of the gift tax annual exclusion, which is $18,000 per person, per donor, in 2024 ($17,000 in 2023). For example, say the estate tax exemption is $13.61 million and you gift $1 million to your daughter. You won’t pay any gift tax on the $1 million gift; however your estate tax exemption decreases by $982,000 ($1 million minus the annual exclusion of $18,000). By utilizing gifting to decrease the size of your estate, you can easily take advantage of the increased exemption. Consider gifting assets with high basis so that you can keep low basis assets in your estate and take advantage of the basis step up upon death.
Funding Trusts
An advanced gifting strategy to consider is gifting assets to a trust. A trust is a fiduciary relationship that allows a third party (trustee) to hold and manage assets on behalf of a beneficiary (or multiple beneficiaries). There are many different types of trusts that you can fund depending on your intentions and the needs of your family. Utilizing trusts like an Irrevocable Life Insurance Trust (ILIT) or a Spousal Lifetime Annuity Trust (SLAT) are great strategies to move wealth out of your estate while taking advantage of the increased estate tax exemption.
Charitable Donations
Another tried and true way to move wealth out of your estate is by charitable gifting. While charitable gifts qualify for the charitable deduction as it relates to the estate tax exemption, by making charitable donations, you can simultaneously decrease the size of your estate while fulfilling the philanthropic wishes of you and your family. For even more incentive, making charitable donations can benefit you on your personal income tax returns.
Regardless of the size of your estate, having a solid estate plan is extremely important for the future of your family. There are many strategies that you can take advantage of to be proactive and responsible when it comes to your assets and your wishes upon death. For more information about estate planning and the tax implications, please contact an estate planning attorney and tax professional that specializes in estate and gift tax. Additionally, reach out to our Private Client Group at Wolf & Company – our experts specialize in gift, estate, and trust needs.
