ST. CROIX INSIGHTS

Changes to the Estate and Gift Tax Exclusions Are (Maybe) Coming

BY BRETT ANDERSON/ST.CROIX ADVISORS, LLC
Back view of extended family exploring the best place for their picnic in autumn. Copy space. Man is aiming at distance.

The rules governing estate and gift tax exclusions are undergoing potential changes. You need to be aware of these to ensure you maximize your tax benefits.

The 2017 Tax Cuts and Jobs Act (TCJA) significantly increased the lifetime estate and gift tax exemption, which currently stands at $13.61 million per individual and $27.22 million for married couples in 2024.

However, these provisions are set to sunset at the end of 2025, reverting to lower 2017 levels. This could potentially reduce the exemption to around $7.5 million per individual and $14.5 million for married couples by 2026, depending on inflation.

NOTE: Keep in mind that this situation is subject to change, depending on factors like the 2024 election outcomes or legislative amendments.

Given this uncertainty, families interested in preserving and passing on their wealth should be proactive in reviewing their estate plans. Waiting until the last minute could result in missed opportunities to minimize estate taxes.

The annual gift tax exclusion also increased in 2024 due to inflation, reaching $18,000 per recipient. This presents an opportunity for individuals to transfer assets tax-free, further maximizing tax benefits.

Here is an example to show a basic way to take advantage of the increased annual gift exclusion:

John and Sarah have three children and five grandchildren. In 2024, they decide to utilize the increased annual gift tax exclusion to transfer wealth to their descendants.

Using the $18,000 per recipient annual gift tax exclusion, John and Sarah can collectively gift $18,000 to each of their eight descendants, totaling $144,000 per year. Over the course of 2024, they can transfer a total of $288,000 to their children and grandchildren without dipping into their combined $27.22 million gift tax exemption.

To leverage the current higher exemptions and potentially avoid future tax implications, individuals should consider gifting strategies.

Questions to ponder include:

  • Can you afford to gift a significant amount to leverage the increased tax exclusion?
  • What assets and how much should you consider gifting?
  • Are your intended recipients prepared to receive these gifts, or should there be controls in place, such as trusts?

If you decide to proceed with gifting, there are various options available, including setting up trusts:

  • Spousal Lifetime Access Trust (SLAT): This trust allows your spouse to receive distributions if needed, providing added flexibility. It’s essential to plan and draft the trust properly to ensure its legitimacy.
  • Trust for Non-Spouse Beneficiaries: This type of trust, benefiting children or grandchildren, offers different setups, including keeping the trust-owned assets with income tax consequences falling on the trust creator. This arrangement reduces the creator’s estate without counting as a gift to the trust heirs.

For individuals whose wealth is primarily tied up in business ownership, gifting business interests may be an option. Discounts for lack of marketability and control could apply, reducing the amount of lifetime exclusion used upon gifting. Valuation methods should adhere to IRS guidelines, often requiring a qualified appraiser’s assessment.

For those with significant brokerage accounts, gifting securities to trusts or outright to recipients is another possibility. Publicly traded securities make determining fair market value straightforward. It’s essential to consider the basis in these securities, as the recipient inherits the donor’s basis for tax purposes. Holding onto low-basis securities may be advantageous for a step-up in basis upon the owner’s death.

Gifting property is also an option, typically requiring a property appraisal to establish fair market value. Similar to securities, considering the basis in the property is important, as the recipient assumes the donor’s basis for tax purposes. Some trusts may allow for substituting trust-owned assets with personal assets later on, capitalizing on a potential basis step-up.

Overall, understanding the implications and exploring various gifting strategies can help individuals maximize tax benefits while ensuring their estate planning aligns with their goals and circumstances.

As your financial advisor, I’m here to provide guidance and support as you navigate these important decisions regarding estate planning and gifting strategies. Whether you’re considering leveraging the current tax exclusions or exploring various options to pass on wealth to your loved ones, don’t hesitate to reach out. My expertise and personalized advice can help you make informed choices tailored to your financial goals and objectives. Let’s work together to ensure your wealth transfer plans align with your overall financial strategy. It’s everyone working in concert—your Estate Planning Attorney, CPA, Financial Advisor, and you—to navigate this ever-changing landscape.

 

The rules governing estate and gift tax exclusions are undergoing potential changes. You need to be aware of these to ensure you maximize your tax benefits.

The 2017 Tax Cuts and Jobs Act (TCJA) significantly increased the lifetime estate and gift tax exemption, which currently stands at $13.61 million per individual and $27.22 million for married couples in 2024.

However, these provisions are set to sunset at the end of 2025, reverting to lower 2017 levels. This could potentially reduce the exemption to around $7.5 million per individual and $14.5 million for married couples by 2026, depending on inflation.

NOTE: Keep in mind that this situation is subject to change, depending on factors like the 2024 election outcomes or legislative amendments.

Given this uncertainty, families interested in preserving and passing on their wealth should be proactive in reviewing their estate plans. Waiting until the last minute could result in missed opportunities to minimize estate taxes.

The annual gift tax exclusion also increased in 2024 due to inflation, reaching $18,000 per recipient. This presents an opportunity for individuals to transfer assets tax-free, further maximizing tax benefits.

Here is an example to show a basic way to take advantage of the increased annual gift exclusion:

John and Sarah have three children and five grandchildren. In 2024, they decide to utilize the increased annual gift tax exclusion to transfer wealth to their descendants.

Using the $18,000 per recipient annual gift tax exclusion, John and Sarah can collectively gift $18,000 to each of their eight descendants, totaling $144,000 per year. Over the course of 2024, they can transfer a total of $288,000 to their children and grandchildren without dipping into their combined $27.22 million gift tax exemption.

To leverage the current higher exemptions and potentially avoid future tax implications, individuals should consider gifting strategies.

Questions to ponder include:

  • Can you afford to gift a significant amount to leverage the increased tax exclusion?
  • What assets and how much should you consider gifting?
  • Are your intended recipients prepared to receive these gifts, or should there be controls in place, such as trusts?

If you decide to proceed with gifting, there are various options available, including setting up trusts:

  • Spousal Lifetime Access Trust (SLAT): This trust allows your spouse to receive distributions if needed, providing added flexibility. It’s essential to plan and draft the trust properly to ensure its legitimacy.
  • Trust for Non-Spouse Beneficiaries: This type of trust, benefiting children or grandchildren, offers different setups, including keeping the trust-owned assets with income tax consequences falling on the trust creator. This arrangement reduces the creator’s estate without counting as a gift to the trust heirs.

For individuals whose wealth is primarily tied up in business ownership, gifting business interests may be an option. Discounts for lack of marketability and control could apply, reducing the amount of lifetime exclusion used upon gifting. Valuation methods should adhere to IRS guidelines, often requiring a qualified appraiser’s assessment.

For those with significant brokerage accounts, gifting securities to trusts or outright to recipients is another possibility. Publicly traded securities make determining fair market value straightforward. It’s essential to consider the basis in these securities, as the recipient inherits the donor’s basis for tax purposes. Holding onto low-basis securities may be advantageous for a step-up in basis upon the owner’s death.

Gifting property is also an option, typically requiring a property appraisal to establish fair market value. Similar to securities, considering the basis in the property is important, as the recipient assumes the donor’s basis for tax purposes. Some trusts may allow for substituting trust-owned assets with personal assets later on, capitalizing on a potential basis step-up.

Overall, understanding the implications and exploring various gifting strategies can help individuals maximize tax benefits while ensuring their estate planning aligns with their goals and circumstances.

As your financial advisor, I’m here to provide guidance and support as you navigate these important decisions regarding estate planning and gifting strategies. Whether you’re considering leveraging the current tax exclusions or exploring various options to pass on wealth to your loved ones, don’t hesitate to reach out. My expertise and personalized advice can help you make informed choices tailored to your financial goals and objectives. Let’s work together to ensure your wealth transfer plans align with your overall financial strategy. It’s everyone working in concert—your Estate Planning Attorney, CPA, Financial Advisor, and you—to navigate this ever-changing landscape.