Currently, tax planning, including estate planning, as part of the personal financial planning process is uncertain given the Biden administration’s tax proposals, the 2024 elections, and record deficit spending on the part of government. The primary reason for this uncertainty relates back to the Tax Cuts and Jobs Act (TCJA) of 2017, which made sweeping changes to the tax provisions applicable to both individuals and businesses. While thankfully, most of the TCJA business tax provisions were made permanent, many of the changes affecting individuals are set to expire in 2026 and revert back to the law as it existed prior to 2018.
To review, the TCJA was signed into law on December 22, 2017 and implemented significant changes to estate and gift tax law. However, it’s essential to note that many of the provisions of the TCJA were not made permanent and included sunset provisions, meaning they were set to expire after a certain period of time unless Congress took action to extend them.
Regarding estate taxes, the TCJA made several key changes, which included the doubling of the estate tax exemption amount. The following is a summary of the key estate tax provisions under the TCJA:
- Increased Exemption Amount: The TCJA doubled the estate tax exemption amount from $5 million per individual to $10 million, for tax years 2018 through 2025, adjusted annually for inflation. For 2024, the estate tax exemption is approximately $13,610,000 per individual (for single individuals) or $27,220,000 (for married couples).
- Portability of Exemption: The TCJA retained the construct of portability, which allows a surviving spouse to utilize any unused portion of the deceased spouse’s estate tax exemption. This provision remains in effect beyond the sunset date of the TCJA.
- Sunset Provision: Unless Congress takes action to extend the provisions of the TCJA, including the increased estate tax exemption amount, the estate tax provisions are set to revert to pre-TCJA levels after December 31, 2025. This would result in a lower estate tax exemption amount absent legislative changes. Without legislative changes, these historically high exemption rates are scheduled to revert back to their 2017 levels, adjusted for inflation, which is expected to only be an estimated $7,200,000 (for single individuals) or $14,200,000 (for married couples). Estates valued above these exemption amounts could be taxed at a 40% estate tax rate.
As part of the personal financial planning process clients should consider using part, or all of the increased exemption amount before it is scheduled to be reduced. Based on previous IRS guidance and conventional wisdom, use of the increased exemption on lifetime gifts will generally be respected by the IRS, even if the donor’s death occurs after the exemption amount has been reduced.
Personal financial planning considerations for the application of the increased exemption amount include lifetime gifts, gifts to a spousal lifetime access trust (SLATs), and gifts to irrevocable grantor trusts. Each of these personal financial planning strategies have additional benefits such as asset protection, income shifting, and income tax reduction.
This level of personal financial planning should include a team of advisors. With proper personal financial planning, of which estate planning is a component, you can preserve the current record-high estate exemptions, and potentially remove the future appreciation of certain assets from an otherwise taxable estate. It’s important for individuals and families with significant assets to stay informed about potential changes to the estate tax laws, and to engage with a personal financial planner to minimize tax liability and ensure the efficient transfer of wealth to future generations.
Tax laws directly impact an individual’s personal financial plan. At Paraklete® Financial we work with CPA’s as part of our client’s collaborative team of advisers. The collaborative team is essential to the personal financial planning process. For more information, please visit us at https://www.parakletefinancial.com
The views expressed are those of the author as of the date noted, are subject to change based on market and other various conditions. Material discussed is meant to provide general information and it is not to be construed as specific investment, tax or legal advice. Keep in mind that current and historical facts may not be indicative of future results. The information contained in our presentations have been compiled from third party sources and is believed to be reliable; however, accuracy is not guaranteed.
