As financial advisors consider year-end tax planning strategies, an imminent concern arises for their high-net-worth clients regarding estate taxes. Key provisions of the 2017 tax overhaul, a hallmark of the Republicans, are set to expire after 2025. Among these provisions is the higher federal gift and estate tax exemption, known as the "basic exclusion amount," enabling wealthier individuals to transfer assets to the next generation without incurring taxes.
The current exemption, set to reach $13.61 million per individual or $27.22 million for spouses in 2024, serves as the tax-free limit on gifts during one's lifetime or at death. However, these limits are expected to decrease by nearly half in 2026, presenting a significant challenge for estate planning.
Robert Dietz, the national director of tax research at Bernstein Private Wealth Management, notes that this impending change is a major topic of discussion with clients, describing it as "the biggest issue that we're talking with clients about right now."
Certified financial planner Ashton Lawrence from Mariner Wealth Advisors adds that this could result in estate tax issues for a substantial number of individuals, potentially subjecting up to 40% of their estate to taxation.
Although there are approximately two years until the provision expires, Dietz emphasizes that certain estate planning strategies require more time to implement. Waiting until 2025 to utilize the exclusion is not advisable.
To capitalize on the higher exemption before 2026, one suggested strategy for married couples is to initiate the removal of assets from their estate through lifetime gifts. For couples affected by the lower exemption in 2026, experts recommend utilizing one spouse's higher exclusion before the provision sunsets.
Dietz advises against evenly splitting gifts between spouses, emphasizing that giving away more than half is necessary to maximize the benefit of the temporarily higher limit.
For clients hesitant about making irrevocable gifts now, another proactive approach is to establish and fund a trust before 2026. Control of the assets can be retained through a "promissory note" outlining a plan to reclaim the assets.
While there is a possibility of Congress intervening to extend the estate and gift tax exclusion beyond 2025, such an outcome is uncertain given other legislative priorities.
We stress the importance of considering these strategies to navigate the evolving landscape of estate taxes. Read our FREE report on how to avoid estate taxes HERE.