The Tax Cuts and Jobs Act (TCJA) of 2017 basically doubled the size that an estate must be to incur estate taxes, from $5.6 million to $11.18 million for individuals (in 2017). Currently, after adjustments for inflation, an individual has a lifetime estate and gift tax exemption of $12.92 million, and a married couple can give away as much as $25.84 million during their lifetimes without incurring federal estate taxes. Because of the much higher exemption level, it is expected that less than 0.1% of the estates of the approximately 3 million persons who pass away in the US each year will owe estate tax.
But the TCJA contains another feature that is coming more and more into focus: the higher estate tax exemption, like many other provisions of the law, is scheduled to sunset at the end of 2025. In other words, unless Congress enacts new legislation that is signed by the president, the lifetime estate and gift tax exemption will be cut roughly in half at the end of 2025. For individuals and families with assets close to the previously lower exemption levels, it is important to take a careful look at the estate, its likely growth, and the possibility that some estates previously well below the taxation threshold may be less favorably positioned on January 1, 2026.
What You Can Do
Annual gifting. One relatively simple method that is often overlooked is the annual gift exclusion. In 2023, an individual may give away up to $17,000 ($34,000 for a married couple) to as many individuals (family, friends, others) as wished without incurring gift tax or even the need to file a gift tax return. Persons who are concerned about breaching the exclusion limit at some future point may be able to transfer significant assets out of their estate, simply by taking maximum advantage of the annual exclusion. Note that there are other exemptions. Generally, gifts made to:
- charitable organizations;
- political organizations;
- educational entities as tuition paid for someone other than the donor;
- doctors or medical institutions in payment for medical expenses other than the donor’s
are typically excluded from consideration for gift tax (you should consult with your financial or tax professional, however).
In addition to efficiently reducing the size of the taxable estate, a consistent annual gifting plan offers the satisfaction to the donor of seeing the benefits of the gift first-hand, during the donor’s lifetime. And an annual gifting plan can be as flexible as necessary: if a new need or valuable cause comes to the donor’s attention, the next year’s gifting plan can be easily adjusted to take changing priorities into consideration. And the gift need not necessarily be in the form of cash. As long as fair market value is established and documented, non-cash assets may be included in a gift.
Trusts. For some high-net-worth families, various trusts may be utilized to reduce estate tax liability, even during the donor’s lifetime. Those considering trusts should consult with a qualified estate planning professional to ensure that the type of trust being used is a good match for the needs of the donor and the intended beneficiaries.
- Irrevocable trusts allow a donor (the “grantor”) to gift assets that can then be used by the beneficiary during the donor’s lifetime, according to the terms of the trust. Because the donor no longer owns the assets, they may be excluded from the taxable estate upon the donor’s death.
- A grantor retained annuity trust (GRAT) enables a donor to place assets in trust for the benefit of heirs or other future recipients while still retaining a fixed annual income (“annuity”) generated by the trust’s assets for a set period. When the grantor dies, the remaining assets in the trust pass to the beneficiary and are excluded from the grantor’s taxable estate. However, if the grantor dies before the term of the annuity payments has passed, the amount remaining in the GRAT at the time of death may become subject to estate tax as part of the grantor’s estate.
There are other types of trusts that may be used to reduce the size of the taxable estate while also benefiting various individuals or charitable entities, both during the lifetime of the donor and after the donor’s passing.
Charitable giving. As mentioned above, there is often no estate or gift tax liability incurred by gifts to charity. Some donors, in fact, may wish to gift assets other than cash. This can often be accomplished through the use of a donor-advised fund (DAF). DAFs are able to receive various types of assets, at which point the donor is provided with a charitable deduction. The DAF can then hold the assets and make distributions to charities as directed by the donor. Once the assets are gifted to the DAF, they are no longer in the donor’s taxable estate, but their disposition is still controlled by the donor. DAFs can provide convenience, flexibility, and a measure of control to donors with various types of appreciated assets that they wish to use to benefit important charitable causes.
A Note on State and Local Taxes
The discussion above has focused primarily on federal estate and gift taxes. But some state and local governments also levy and collect inheritance, estate, and gift taxes, and it’s important for prospective donors to know about such provisions that may affect their plans. This is another instance where consulting with a qualified estate planning professional can prove invaluable.
Mathis Wealth Management is a fiduciary financial and wealth advisor. We provide guidance on important financial matters that always places our clients’ interests ahead of everything else. If you would like to learn more, visit our website to read our article, “Six Estate Planning Tips for Blended Families.”
