Practical Steps and Strategies for Navigating the Estate Tax Sunset

February 1, 2024

Estate tax laws are a dynamic aspect of the financial landscape, and staying informed about changes is crucial for high-net-worth individuals (HNWIs). Starting December 31, 2025, the federal estate tax exemption will decrease from the current $13,610,000 per person to approximately half of that amount, accounting for annual inflation increases. This shift could have significant implications for your estate planning, tax strategy, and overall wealth management approach.

Estate Tax Exemption Sunset at the End of 2025

Due to the scheduled sunset of current exemption thresholds, changes to estate tax laws are imminent. Without legislative action, these thresholds will revert to pre-2018 levels, potentially decreasing the estate tax exemption and exposing more of an individual’s estate to taxation. The uncertainty about Congress preventing the sunset or enacting new legislation complicates estate planning, especially for affluent individuals who may face a higher tax burden on their estates.

Potential Impact on Estates and Inheritances

The estate tax exemption sunset not only affects finances but also shapes wealth distribution and inheritance structures. For those with estates near the current limit, the sunset may significantly raise taxable assets, potentially increasing heirs’ tax liability. This challenge intensifies when illiquid assets like real estate or closely held businesses are involved, potentially requiring families to liquidate assets to cover tax liabilities and disrupting long-term wealth preservation strategies.

Estate Planning Strategies To Reduce Estate Taxes

In cases where your taxable estate is anticipated to surpass the exemption, multiple approaches exist to circumvent or minimize this tax burden. Here are some methods that range in complexity from relatively straightforward execution to more intricate options that may involve additional support. Nevertheless, you should consult with your financial advisor and attorney to ensure you select the best option for your goals and finances.

Annual Gifting

In 2024, you can gift up to $18,000 per person annually, irrespective of familial ties, without incurring gift/estate tax or completing a gift tax form. Married couples can employ “gift splitting” to collectively gift up to $36,000 annually to a single individual. This common strategy involves gifting to children, grandchildren, and other relatives. The annual gifting practice serves the dual purpose of diminishing the taxable estate’s value and imparting lessons on financial stewardship to younger generations.

Qualified Transfers

Current legislation allows individuals to make payments directly to qualified academic institutions or medical care providers on behalf of another person. For instance, covering your granddaughter’s tuition directly can both evade the gift tax and diminish the taxable estate’s value.

Charitable Contributions

Donating to qualified charities during your lifetime provides an avenue to reduce your taxable estate. Utilizing tools like Donor Advised Funds (DAFs) allows you to contribute cash or specific types of property, gaining an immediate income tax deduction if you itemize your taxes. Property contributed to DAFs can grow and be granted to charities at your direction over time.

Spousal Lifetime Access Trust (SLAT)

SLATs, being irrevocable trusts, allow one spouse to gift property into a trust for the benefit of the other spouse or other named beneficiaries. Careful structuring can remove the contributed property and its potential appreciation from the donor’s estate. However, it’s essential to note that assets in SLATs do not receive a “step up” in cost basis at the donor’s death.

Charitable Remainder Trust (CRT)

CRTs involve contributing property into the trust, receiving a charitable deduction, avoiding capital gains taxes, and receiving an income during your lifetime. Highly appreciated assets are commonly contributed, and the remainder of interest is gifted to specified charities upon the donor’s death.

Family LLC

In a Family LLC, senior family members transfer assets into the LLC, retaining control while giving up ownership for estate tax purposes. This structure is advantageous for families with real estate and closely held businesses, necessitating careful analysis by estate planning professionals to ensure compliance.

Intentionally Defective Grantor Trust (IDGT)

IDGTs involve “selling” property to the trust in exchange for a promissory note, providing an effective estate planning tool to lower the taxable estate while selling assets at a locked-in value. Grantors are typically responsible for paying income taxes generated by trust assets, offering a strategic balance between income and estate tax considerations.

Practical Steps for Preparation

Review Estate Plans

Regularly review and update estate plans to align with current laws and anticipate changes. Work with financial advisors and legal professionals to ensure your estate plans are flexible and responsive to evolving circumstances.

Engage in Comprehensive Financial Planning

Consider the broader financial picture, including investment strategies, insurance coverage, and liquidity needs. A holistic approach to financial planning can help identify areas of potential exposure and address them proactively.

Stay Informed

Keep abreast of legislative developments and be prepared to adjust strategies based on new laws or extensions to the current exemption limits.

Final Thoughts

As we approach the 2026 sunset of the estate tax exemption, individuals with substantial wealth face a shifting landscape that requires careful planning. While the potential impact on estates and inheritances is substantial, proactive estate planning strategies can help minimize tax exposure and preserve wealth for future generations. Staying informed, engaging in comprehensive financial planning, and regularly reviewing estate plans are essential to preparing for the evolving estate tax laws.

At First Western Trust, we understand the complexities of estate planning and are committed to confidently helping you navigate these changes. Our Trust & Estates team of experienced professionals is ready to provide personalized guidance tailored to your unique financial situation. We invite you to schedule an appointment to learn more about the implications of the estate tax exemption sunset and to receive a customized plan designed to safeguard your legacy.

Schedule your appointment today to learn more and receive a holistic financial plan that aligns with your goals and values.

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