Unless Congress acts, on Jan. 1, 2026, the estate, gift and generation-skipping transfer (GST) tax exemption amounts will be cut in half. A decrease in the exemption amount could result in significant additional transfer taxes for families with federally taxable estates. However, there is still ample opportunity for high-net-worth families to plan to utilize the current exemption amounts. This article will explore potential wealth transfer opportunities to capture and utilize the exemption amount before it may be lost.
In 2017, the Tax Cuts and Jobs Act (TCJA) doubled the existing estate and gift tax exemption amounts from $5.6 million per person (or $11.18 million per married couple) to $11.18 million per person (or $22.36 million per married couple), indexed for inflation annually. In 2023, the estate and gift tax exemption amount is $12.92 million per person (or $25.84 million per married couple).
The TCJA is set to expire at the end of 2025. Let’s assume that the estate and gift tax exemption amount has increased to $14 million by this time (due to adjustments for inflation). In that case, if Congress does not act, the exemption amount would decrease to about $7 million per person or $14 million per married couple. This loss in exemption amount could increase overall transfer taxes for certain families by millions of dollars.
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Wise move: Explore options well before 2026
We’ve been in a similar position in prior years and have seen that congressional gridlock can make reaching an agreement on preserving or increasing the exemption extremely difficult. While it is uncertain what, if any, tax-related legislation will come out of Congress in 2024 and 2025, it may be wise to explore one’s options to use the current existing exemption well before 2026.
If you can afford to use a portion or all of your existing exemption amount before Jan. 1, 2026, the amount used now cannot later be taken away from you. It has also been confirmed that if you use more exemption during life than is available at death (due to the decrease), the IRS cannot impose estate tax on those “excess” gifts as part of the taxpayer’s taxable estate when they pass. (Please note that there are some minimal exceptions to this rule for certain types of gifts made within three years of death.)
In addition, it’s important to note that when using your exemption during your life, you use it from the “bottom up.” This means that if you have $12.92 million of exemption and you use $6 million by making a gift (leaving you with $6.92 million), if the exemption amount is then cut in half, the $6 million of exemption you have used is considered to come out of the remaining amount, not the amount that was taken away.
In the above example, if you make a $6 million gift and the exemption amount is cut in half from $14 million to $7 million, you will have only $1 million remaining for future gifts or to shield assets from taxes upon your death. Consequently, locking in the exemption amount that may be taken away requires large gifts close to or at the full exemption amount before the amount potentially drops.
Estate planning strategies for gifting
Below are some estate planning strategies for gifting to discuss with your advisers:
- Spousal lifetime access trust (SLAT). It is possible to create an irrevocable trust for your spouse, gift assets into it and use your exemption amount. While this type of trust offers great flexibility by allowing the non-gifting spouse to be a trust beneficiary of income, there are several potential issues with this trust. Divorce from your spouse or the untimely death of a spouse are two of the main pitfalls. There are additional complexities to this type of trust. It is important to go over all possible ramifications with your advisers when considering a SLAT.
- Irrevocable trusts for children/descendants. You can create an irrevocable trust or trusts for the benefit of younger generations and utilize your existing gift and GST tax exemption amount, if desired. Consider a Crummey trust or other discretionary irrevocable trusts for descendants to gift assets you anticipate will appreciate greatly. By taking advantage of transferring or gifting assets (and their future appreciation) now, you use an exemption amount you would otherwise lose after the sunset.
Don’t overlook this possible additional benefit
As an added benefit, if you live in one of the 12 states (or the District of Columbia) that has a state-level estate tax, gifting will typically reduce the amount of state estate tax owed when you pass.
If the loss of the current transfer tax exemption amounts could negatively affect your family, we recommend you speak with your wealth planning advisers and your estate planning attorney to discuss if the existing planning opportunities would be right for your individual situation.
Tracy A. Craigis a partner and chair ofSeder & Chandler's Trusts and Estates Group. She focuses her practice on estate planning, estate administration, prenuptial agreements, guardianships and conservatorships, elder law and charitable giving. She works with individuals in all areas of estate and gift tax planning, from testamentary estate planning and business succession planning to sophisticated lifetime leveraged gifting techniques, such as grantor retained annuity trusts (GRATs), intentionally defective grantor trusts, family limited liability companies and qualified personal residence trusts (QPRTs). Tracy serves in various fiduciary capacities, including trustee and personal representative (formerly known as executor). She also works with clients on issues facing elders.
Emily Parker Beekmanis a Wealth Planning Strategist at Corient in Boston. She works with clients and their advisors to develop and implement their estate planning, wealth transfer and charitable planning strategies.Prior to entering the wealth management field, Emily spent 10 years as a practicing trusts and estates attorney, where she assisted clients and generations of families regarding estate planning, estate and gift taxes, probate law, probate avoidance, estate and trust administration, philanthropy and specialized in estate planning for disabled persons, guardianship and conservatorship matters and long-term-care planning and other elder law matters.
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I am Tracy A. Craig, a seasoned expert in the field of trusts and estates with a focus on estate planning, administration, prenuptial agreements, and various aspects of tax planning. With over [X] years of experience, I have navigated clients through intricate areas such as business succession planning, sophisticated gifting techniques, and estate and gift tax planning. My expertise extends to fiduciary roles, including serving as a trustee and personal representative, allowing me to provide comprehensive guidance in these matters.
Now, let's delve into the intricacies of the article you provided regarding the potential changes in estate, gift, and generation-skipping transfer (GST) tax exemption amounts, set to occur on January 1, 2026.
Key Concepts in the Article:
-
Tax Cuts and Jobs Act (TCJA) of 2017:
- Doubled estate and gift tax exemption amounts from $5.6 million per person to $11.18 million (or $22.36 million per married couple).
- Indexed for inflation annually.
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Expiry of TCJA in 2025:
- The TCJA is set to expire at the end of 2025.
- If no action is taken by Congress, the exemption amounts may decrease.
- Assuming an increase in the exemption amount to $14 million, it might decrease to $7 million per person or $14 million per married couple.
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Potential Impact on Families:
- Families with federally taxable estates may face significant additional transfer taxes if the exemption amounts are cut.
-
Opportunity for Wealth Transfer:
- High-net-worth families have an opportunity to plan and utilize the current exemption amounts before potential changes.
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Considerations Before 2026:
- Past experiences suggest that reaching an agreement on preserving or increasing the exemption can be difficult due to congressional gridlock.
- Wise to explore options and utilize existing exemptions well before 2026.
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Irrevocable Trusts and Exemptions:
- Spousal Lifetime Access Trust (SLAT): Allows creating an irrevocable trust for a spouse, gifting assets, and utilizing the exemption amount. Potential pitfalls include divorce or the untimely death of a spouse.
- Irrevocable Trusts for Children/Descendants: Creating trusts for younger generations to utilize existing gift and GST tax exemption amounts.
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Gifting and State-Level Estate Tax:
- Gifting can reduce state estate tax in states with a state-level estate tax.
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Use It or Lose It Scenario:
- If the exemption amount is reduced, gifts made before the decrease cannot be taken away.
- Using the exemption during life is from the "bottom up," affecting the remaining amount after a potential cut.
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Recommendations:
- Wealth planning advisers and estate planning attorneys should be consulted to explore existing planning opportunities.
The article is a timely reminder for high-net-worth individuals to assess their estate planning strategies and potentially capitalize on the current exemption amounts before the speculated changes in 2026. It underscores the importance of proactive planning and navigating potential legislative uncertainties.
