Despite the gridlock in Washington, D.C., and the uncertainties of the upcoming election, taxpayers presently have a known window of opportunity to minimize estate and gift taxes. The estate and gift tax exemption is at a historic high and is set to increase moderately in the next year. Importantly, however, this exemption amount has a sunset date, leaving a limited opportunity to secure significant tax savings.
The 2017 Tax Cuts and Jobs Act (TCJA) raised the estate and gift tax exemption so that in 2024, the amount was $13.61 million per person or $27.22 million for a married couple. The TCJA is set to expire at the end of 2025 and anticipating what action Congress may take, especially in an election year, is speculative. Given the uncertainties and the possibility that Congress would make changes retroactive to the beginning of 2025, the window of certainty to act is the calendar year 2024, especially if taking full advantage of your exemption and minimizing estate tax is a priority.
Notably, if you use some or all the existing exemption amount before January 1, 2026, those transfers cannot later be considered taxable if the exemption amount is reduced. As well, if you use more exemptions during your life than is available at the time of your death because of a future reduction, with very few exceptions, the IRS cannot impose tax on the excess transfers.
Gifting strategies to use your existing exemption might include creating a Spousal Lifetime Access Trust (SLAT) or establishing irrevocable trusts for descendants. A SLAT uses your exemption amount to create an irrevocable trust and provides flexibility for your spouse to receive trust income. An irrevocable trust benefiting younger generations can be an especially effective way to transfer appreciating assets. By gifting assets now, you can fully take advantage of the high exemption amounts that will disappear once the current law sunsets.
Just remember, effective planning takes time. It is important that you understand key provisions and limitations of sophisticated trust planning and that you have time to fully implement your plan. By analyzing your estate plan now, you can make the best choices about a structure for gifting, the impact on your liquidity, as well as overall tax benefits during your lifetime and for your beneficiaries. Talk to your estate planning attorney soon to discuss the options that will give you the peace of mind you deserve.
Michael I. Kling, founder of Kling Law Offices, has more than 30 years of experience providing financial, estate planning, asset protection, and business planning services including estate planning, wills, trusts, probate, trust administration, asset protection, business, and tax and corporate law.
