The Tax Cuts and Jobs Act of 2017 (TCJA) made a massive increase to the estate and gift tax exemption – roughly doubling it, in fact, from $5.49 million in 2017 to $11.18 million in 2018, rising for inflation to 2023’s $12.92 million exemption per person.
But this provision of the TCJA is one of many which will sunset effective December 31, 2025 unless Congress takes steps in the interim to make it permanent – meaning the estate exemption for 2026 may revert to $5.49 million as adjusted for inflation (currently projected at ~$7 million).
What You Can Do About It:
If your estate is valued at $12.92 million or higher in 2023, or if you expect to hit that mark before 2026, consider gifting some of it before the end of 2025.
- The 2023 gift exclusion amount is increased to $17,000 – per giftor per recipient, with no limit on the number of gifts allowed. Therefore, if you are married, you and your spouse can effectively give $34,000 to anyone you like, not subject to taxes. A couple with three children and five grandchildren, then, can by gifting each of them with $34,000 in 2023, exclude $272,000 from tax liability for this year. And you can continue to make these gifts every year.
- Larger gifts can be made, subject to the filing of a gift tax return, with an eye to reducing your taxable estate for 2026 to under $7 million. These gifts, if made while the estate and gift exemption are at their current high levels, will not, according to the IRS, adversely impact your estate if indeed the estate exclusion reverts to its pre-TCJA level. Rather, they will be counted against the estate and gift exemption in effect at the time of the gift.
- Some gifts can be made wholly tax-free – for example, educational and medical expenses – so long as payment is made directly to the provider, such as the school or college, or the hospital.
- If large charitable contributions are part of your plans, they can be another strategy to reduce your taxable estate. You can create a charitable trust, use a donor-advised fund, or make these contributions directly to the charitable institution(s) of your choice.
- You may also want to consider setting up trusts for your descendants, which can help protect your assets for the future.
If you have high-value life insurance policies, you can place ownership of one or more of these policies into an irrevocable life insurance trust (ILIT), which will shield the proceeds from estate taxes while providing the beneficiaries with liquidity upon your death.
These are just a few of the available strategies for reducing your taxable estate – some of them might be ideal for you, some less so. We urge you to consult with our CPAs/financial planners to tailor a custom-fit estate plan for you, one which takes into account every aspect of your financial picture, every one of your goals and aspirations for yourself and your family.
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Until next time –