Upcoming tax law changes will lower the inheritance tax threshold
Key Takeaways
- The 2017 Tax Cuts and Jobs Act inheritance tax exemption will expire at the end of 2025.
- It’s a good idea to review your estate plan every few years to safeguard your estate and ensure your wishes will be honored.
- You can lower your future inheritance tax with some strategic approaches.
Let’s be honest, estate planning is not typically high on the list of fun ways to spend an afternoon. However, with the inheritance tax threshold set to sunset on Dec. 31, 2025, as well as the constantly changing state and federal tax regulations, CPA Tom Gates says now is the time to review your inheritance planning strategy.
“If you don’t have an estate plan in place, now is definitely the time to get your ducks in a row,” says Tom. “If you’ve already mapped out an inheritance plan, reviewing it every few years is a good idea, especially with the exemption set to sunset.”
Before jumping into Tom’s list of tips and tactics to reduce inheritance tax, let’s review the significance of the 2017 Tax Cuts and Jobs Act (TCJA) inheritance tax exemption expiring at the end of 2025. For 2024, the lifetime estate and gift exemption stands at $13.61 million per person and $27.22 million for a married couple.
That means if you die in 2024, any assets passed to beneficiaries under those thresholds will not be subject to inheritance taxes. However, the exemption is set to revert to 2017 levels, adjusted for inflation, starting Jan. 1, 2026. Barring any new tax legislation, that will drop the exemption down to approximately $7.5 million for individuals and $14.5 million for married couples.
While most Americans will fall under that threshold, Tom says it is still worth reviewing your estate planning strategy to forecast your asset value in two or three years to safeguard your estate and ensure your wishes will be honored.
“Someone might be holding $4 or $5 million now, but in two years, their portfolio has shot up and their home value has skyrocketed. They could be knocking on that $7.5 million dollar door very quickly,” says Tom.
Regardless of your estate value, there are many reasons to review your inheritance planning strategy every few years.
“Common estate planning triggers include divorce, childbirth, children coming of age, changes to your state tax code, a child or spouse who has special needs,” says Tom. “Life happens, and you want to make sure you pass off your assets to your chosen beneficiaries in the most tax–efficient way possible.”
While every estate planning situation is different, consulting with a good estate attorney or certified estate planner is critical.
“Every state’s inheritance tax rules are a little different,” says Tom. “There are six states that require inheritance taxes, and an estate attorney can walk you through the best way to maximize your tax savings per your state.”
Here are some strategic approaches you can employ now to lower your future inheritance tax:
TAKE ADVANTAGE OF THE ANNUAL GIFT EXCLUSION
The IRS allows individuals to give away a certain amount each year to as many people as they wish without incurring gift tax. For 2024, the annual gift exclusion amount is $18,000 per recipient or $36,000 for married couples. By making annual gifts, you can reduce the size of your taxable estate over time.
“There are no limits on how many people you gift and as long as you stay under the exemption, it does not apply to your lifetime exemption,” adds Tom.
ESTABLISH A TRUST
Trusts are powerful tools in estate planning that can help minimize estate taxes, provide control over asset distribution, and help avoid probate laws per state. Your estate planner will help identify which trusts are suitable for your needs.
Revocable Living Trust – Allows you to manage your assets during your lifetime and specify their distribution after your death. It can be altered or revoked at any time.
Irrevocable Trust – Once established, it cannot be changed. It provides protection from creditors as well as removes the assets from your estate.
Irrevocable Life Insurance Trust – Once established, it cannot be changed. This trust can help protect assets from creditors and reduce estate taxes.
Special Needs Trust – Provides for a beneficiary with special needs without disqualifying them from government benefits.
Grantor Retained Annuity Trust – Transfers assets to a trust while retaining an annuity for a specified term. Any appreciation in the trust’s assets beyond the annuity payments is transferred to beneficiaries tax-free.
Charitable Remainder Trust – Provides income to you or your beneficiaries for a specified term, after which the remainder goes to a designated charity. This can generate income tax deductions and reduce estate size.
MAKE CHARITABLE DONATIONS
Charitable donations can significantly reduce the size of your taxable estate. Donations to qualified charities are deductible from your estate, lowering the overall estate tax liability. Types of charitable giving include:
Outright Gifts – Direct donations to charities
Charitable Lead Trusts – Provides income to a charity for a specified term, with the remainder going to beneficiaries, reducing the taxable estate.
TAKE ADVANTAGE OF THE MARITAL DEDUCTION
The unlimited marital deduction allows you to transfer unlimited assets to your spouse free of estate and gift tax, provided your spouse is a U.S. citizen. This can defer estate taxes until the surviving spouse’s death. Balancing asset transfers between spouses will maximize the use of both spouses’ lifetime exemptions.
PLAN FOR PORTABILITY OF THE ESTATE TAX EXEMPTION
Portability allows a surviving spouse to use any unused portion of the deceased spouse’s estate tax exemption, effectively doubling the amount a married couple can transfer tax-free. This requires filing an estate tax return upon the death of the first spouse to elect portability, even if no tax is owed.
These are just a few of the myriad of other inheritance planning strategies that a trusted estate attorney or planner can apply to your unique situation.
“The key is to have those conversations now rather than waiting for the estate tax exemption to sunset, or worse, for a major life event to catch you unprepared,” adds Tom.
For more guidance on inheritance planning strategies that can help lower your tax burden or any other business or personal financial planning questions, talk to a CWA advisor today.
