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Planning for Upcoming Changes to Estate Tax Laws

Keel Point

October 20, 2023

The 2017 Tax Cuts and Jobs Act (TCJA) increased the lifetime gift and estate tax exemption to $11,180,000. This exemption represents the amount of wealth that can be transferred during life or at death to descendants without triggering gift or estate tax. The lifetime exemption is indexed for inflation; for 2023, it is $12.92 million or $25.84M for married couples.

As enacted in the TCJA, the increased exemption amount is temporary and if Congress does not act, beginning in 2026 the exemption will effectively be reduced in half. That means, assuming modest inflation adjustments, the exemption amount will be reduced to approximately $7M ($14M for married couples). While it’s possible Congress will step in to prevent this tax “cliff,” families should review their estate plans now to consider how the possible rollback of the lifetime exemption amount will affect them.

High net-worth families should determine whether it makes sense to make large gifts prior to 2026 to take advantage of the increased exemption. Failing to utilize one’s lifetime exemption could result in a 40% estate tax on assets at death that otherwise could have been gifted tax-free during life. The potential tax savings of acting now could exceed $5M for a married couple.

Lifetime gifts can be made in trust and can be structured to address future liquidity needs. For example, the grantor could fund a Spousal Lifetime Access Trust (SLAT) which names the grantor’s spouse as a trust beneficiary. Naming one’s spouse as beneficiary can ensure financial security providing peace of mind. If access to gifted assets is not a concern, gifts in trust for descendants is an effective way to reduce the future size of the estate.

A decision to make a large gift should be followed with an analysis of what to give. Gifts of appreciating assets remove not only the value of the gift but all future appreciation from the grantor’s estate. Gifting assets that are subject to valuation discounts (typically closely held business interests) can enhance the benefits of making lifetime gifts.

We recommend high net-worth individuals consult with their tax advisors to determine whether lifetime gifting makes sense for them. For persons with significant wealth, taking advantage of the increased exemption amount can reduce taxes and increase the value of assets passing to heirs.

 

By: Douglas Andre

 Chief Wealth Officer & Senior Family Office Counsel of Keel Point

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