The Tax Cuts and Jobs Act (TCJA) of 2017 provided a significant estate planning break for those who might previously have been facing a large tax bill due to the size of their estate. However, in order for the act to pass, it had to include a “sunset” clause that reverted certain provisions back to their previous state on a certain date. Now that the date is looming, it’s time for those who might be affected to examine their existing estate planning strategies while they still have a chance to take advantage of a higher lifetime gift and estate tax exemption.
In 2017, prior to the passage of the TCJA, the federal gift and estate tax exemption was $5.49 million for an individual ($10.98 million for a married couple). The TCJA doubled that exemption to $11.18 for an individual in 2018, with adjustments for inflation in the years after, bringing it up to $13.99 million in 2025. The problem is that this increase expires at the end of 2025, plunging the exemption down to $5 million adjusted for inflation (predicted to be slightly above $7 million) in 2026.
Does that mean it is not safe to give gifts that might be above the new, lower threshold if Congress does not act to extend the applicable provisions of the TCJA? No. The Internal Revenue Service (IRS) released regulations in November 2019 stating that gifts completed between 2018 and 2025 will benefit from the higher exemption even if the taxpayer dies in a year where the exemption is lower than when the gift was made. What this does mean is that those with estates projected to be above the lower exemption level should be speaking with an estate planning attorney now to learn about their options for minimizing their estate taxes through preemptive gifting while they still can.
While there is some support in Congress for extending the existing level of estate tax exemption or making it permanent, particularly in the Republican party, doing so will require new legislation. That does not make it a wise idea to just wait and see what happens, in the expectation that they will be able to overcome the challenge of only holding narrow majorities in the House and Senate to get a new law passed. Depending on how large gifts are structured, they often require extensive planning to make them
both tax efficient and aligned with overall estate planning goals. In addition, certain kinds of assets may require a qualified appraisal that meets IRS requirements. Delay in examining your options and deciding on a strategy could make it impossible to complete necessary steps before the year-end deadline.
What does this mean? The estate tax is 40%. Taxpayers who die after December 31, 2025, with estates large enough to be taxed at the federal level who did not make gifts in excess of $7 million before the sunset will lose their chance to take advantage of the higher limit and diminish the value of what they have to pass on with a steep tax bill that could have been avoided.
If you have (or expect to have) assets above the $7 million limit that is set to take effect in 2026, a qualified legal professional can walk you through potential options for gifting strategies that can help you take advantage of the current higher exemption. Certain kinds of irrevocable trusts can provide the opportunity to effectively transfer assets out of your estate, provide asset protection to named beneficiaries, and still retain indirect access to those assets. An estate planning attorney who is familiar with your goals and circumstances can provide individualized advice on the best gifting strategy for you.
If you’re unsure of how upcoming legal changes will affect your estate planning, the experienced attorneys at Velasco Law Group can help. We design comprehensive strategies that take advantage of the legal tools available to not only pass your assets on as you wish, but to minimize your tax liability so more of your wealth goes to the ones you love. We can provide consultations in English and Spanish. To find out more about how you can protect your estate from the TCJA’s sunset, contact us here to schedule your consultation as soon as possible.
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