The current high estate tax exemption has provided a unique opportunity for individuals and families to transfer wealth with minimal tax consequences. However, unless Congress takes action, these historically high exemptions are set to sunset after December 31, 2025, effectively reducing the amount of wealth that can be passed on tax-free. This impending change makes it crucial for high-net-worth individuals to act now to protect and maximize their legacy.
Understanding the Impending Estate Tax Changes
Under the Tax Cuts and Jobs Act (TCJA) of 2017, the federal estate and gift tax exemption was significantly increased. For 2024, the exemption sits at $13.61 million per individual ($27.22 million per married couple). However, if the law sunsets as scheduled, the exemption will drop by roughly half—to around $7 million per individual in 2026, adjusted for inflation.
For families with significant wealth, this change could lead to a substantial increase in estate taxes, potentially forcing heirs to liquidate assets to cover tax liabilities. The current estate tax rate remains at 40% on amounts exceeding the exemption, making proactive planning essential.
Key Strategies to Take Advantage of the High Exemption Before It’s Gone
To prepare for the possible sunset of high exemptions, consider implementing these strategies now:
#1: Maximize Lifetime Gifting
One of the most effective ways to reduce future estate taxes is through lifetime gifting. The current exemption allows individuals to gift up to $13.61 million tax-free, meaning you can transfer significant wealth before the exemption decreases.
Gifting Strategies to Consider:
- Make Use of Annual Gift Exclusions – In 2024, you can gift $18,000 per recipient ($36,000 for married couples) tax-free without affecting your lifetime exemption.
- Fund Irrevocable Trusts – Gifts to irrevocable trusts, such as grantor retained annuity trusts (GRATs) or dynasty trusts, can remove assets from your taxable estate while benefiting future generations.
- Direct Payments for Education & Healthcare – Tuition and medical expenses paid directly to institutions do not count toward your gift tax exemption, making them an efficient way to transfer wealth tax-free.
#2: Utilize Spousal Planning Techniques
Married couples have unique planning opportunities to leverage both spouses’ exemptions. One popular strategy is the Spousal Lifetime Access Trust (SLAT), which allows one spouse to transfer assets into a trust while still providing financial security for the other spouse.
Key benefits of a SLAT:
- Protects assets from estate taxes while allowing indirect access to funds.
- Locks in today’s high exemption before the reduction.
- Provides creditor and divorce protection for beneficiaries.
#3: Establish and Fund Irrevocable Trusts
Trusts can help preserve wealth for future generations while minimizing estate tax exposure. Consider these options:
- Dynasty Trusts – Designed to last multiple generations, these trusts shield assets from estate taxes long-term.
- Grantor Retained Annuity Trusts (GRATs) – Allow you to transfer appreciation on assets to heirs with little or no gift tax impact.
- Irrevocable Life Insurance Trusts (ILITs) – Keep life insurance proceeds outside your taxable estate to provide liquidity for heirs.
#4: Use Family Limited Partnerships (FLPs) and LLCs
FLPs and LLCs allow families to transfer business interests or investments while maintaining control and benefiting from valuation discounts for estate and gift tax purposes. These structures are particularly useful for business owners or families with significant real estate holdings.
#5: Review and Update Your Estate Plan
With the sunset of the high exemption approaching, now is the time to review and revise your estate plan. Work with an experienced estate planning attorney and tax advisor to:
- Ensure your documents align with your goals and the upcoming tax changes.
- Reevaluate power of attorney, wills, and trusts to reflect current laws.
- Consider charitable giving strategies, such as donor-advised funds or charitable remainder trusts, to maximize tax efficiency.
Act Now to Secure Your Legacy
The scheduled reduction in the estate tax exemption could significantly impact families with substantial wealth. By acting now, you can take advantage of today’s historically high limits to reduce tax burdens, protect your assets, and ensure a lasting financial legacy.
Next Steps:
Consult with an estate planning attorney to review your current plan.
Evaluate gifting opportunities before the exemption decreases.
Consider trusts, FLPs, and other wealth transfer strategies to minimize taxes.
The clock is ticking—start your estate planning now with Simpson Law, PA. We can help you secure your family’s financial future before the law changes.