Prepare Now for Coming Estate Tax Changes

The Tax Cuts and Jobs Act (TCJA) nearly doubled the lifetime estate and gift tax exemption from $5.6 million for individuals (and $11.18 million for married couples) to $11.18 million and $22.36 million for married couples), indexed for inflation after 2018. Right now, the exemption stands at $12.92 million per person and $22.84 million for couples, as reported in a recent article, “How To Prepare Clients Now For Looming Estate Tax Changes” from Financial Advisor.

Pursuant to the TCJA, all of this is set to change on January 1, 2026, resulting in a roughly 50 percent reduction over the next few years. Individuals could see their federal estate tax exemption dipping to approximately $7 million, while couples could see a decrease to $14 million.

In anticipation of this drastic change, estate planning attorneys are reviewing plans now with clients to implement an appropriate course of action in less than three years. This is especially important for clients who might not have been impacted by estate tax laws in the past, but who will be in 2026 because of a combination of the lowered amount and any growth in their assets.

Here are some strategies for preparing for the new lowered levels:

Review the complete estate plan with an estate planning attorney. Without a proper estate plan, it’s easy to lose sight of the value of all assets, and you may be entirely in the dark concerning estate tax liabilities. For instance, a Boomer who hasn’t reviewed their estate plan in 20 years could see an enormous change in the size of their assets, possibly bringing them over the $7 million estate tax exemption threshold. Failing to address this could risk financial security in retirement and significantly impact their heirs.

Create a strategy with the information you have now. First, review your estate plan with an eye to moving assets out of the estate. You should then consider the overall goals and time horizons to determine the best way forward. There are several optimal strategies, including using the annual gift tax exclusion, which, as of 2023, is up to $17,000 per person.

The use of trusts is a well-known facet of estate planning. Which type of trust is used depends upon your specific situation. Trusts generate income and protect access to assets used for living expenses, reduce taxation on the estate, protect assets from creditors, and keep a family’s financial assets and affairs private upon death.

Other strategies to consider:

Allocating assets to a 529 education plan allows you to put money aside for the education of loved ones. It can be used for education from kindergarten to college, graduate coursework and more. There is also an option of accelerating gifting by giving up to five years of contributions in one year per individual.

Suppose you wish to pass larger assets to grandchildren, instead of gifting large sums to them during their lifetimes? Consider generation-skipping trusts, which allow you to create a separate fund for grandchildren under age 37.

There is no one-size-fits-all approach to estate planning. However, a discussion with your estate planning attorney will clarify your wishes and allow you to plan for the future.  Rose Kennedy, Esquire, here in Berks County, Pennsylvania, is available to meet with you.

Reference: Financial Advisor (May 8, 2023) “How To Prepare Clients Now For Looming Estate Tax Changes”