Now is the perfect time to take a hard look at your estate plan. Unless Congress intervenes, the Tax Cuts and Jobs Act (TCJA) is set to expire at the end of 2025. If you have a significant estate, you could be hit with a much larger tax bill when it comes time to pass on your wealth. Fortunately, there is still time to revise your plan using strategies that can mitigate the tax impact.
First, let’s look at what is about to change. Right now, individuals can exclude up to $13.61 million from their taxable estate, with couples getting double that amount. However, if the TCJA sunsets as planned, we’re looking at a dramatic drop to 2018 levels, which would be about $5 million per person (adjusted for inflation) in 20261. For many families, this could mean a much larger chunk of their estate getting hit with federal taxes.
So what can you do? One of the most effective strategies to consider is lifetime gifting ahead of the expiration of the TCJA. By giving now, you can lock in the current high exemption limits. You also get to see how your heirs handle the wealth while you’re still around.
No matter what happens to the TCJA exemptions, there are plenty of estate planning strategies you can use to pursue better outcomes for you and your family. If you’re 70½ or older, Qualified Charitable Distributions (QCDs) allow you to transfer up to $100,000 annually from your IRA to a charity, tax-free2. It’s a win-win: the charity benefits, and you shrink your taxable estate. For more flexibility, a Donor Advised Fund (DAF) might make sense. You get the tax deduction now but can decide on the charities later. These strategies will remain valuable even after the TCJA expires, though their impact on your overall estate may change as exemption limits decrease.
Now, let’s talk about trusts and life insurance. Irrevocable trusts can protect your assets and set terms for the distribution of your wealth. And don’t overlook cash value life insurance policies like Whole Life or Indexed Universal Life (IUL). Coupled with an irrevocable trust, these can be tax-efficient wealth transfer tools. If the benefit of a cash value life insurance policy is nestled in an irrevocable trust, it is shielded both from ordinary income tax and estate taxes. These strategies will still be useful after the TCJA expires. In fact, their effectiveness in reducing your taxable estate may be amplified due to the lower exemption limits.
There is also annual gifting to consider. This year, you can gift up to $18,000 per person or $36,000 for a couple without triggering gift tax3. Over time, it’s a simple but effective way to chip away at your taxable estate. This annual exclusion is separate from the lifetime exemption and will continue to be available after the TCJA expires, and its importance may increase as the lifetime exemption decreases.
If education funding is on your radar, 529 plans offer tax-efficient contributions. You can make substantial lump-sum contributions while keeping most gifts free from gift taxes – a good move for future educational expenses. This strategy will remain unchanged by the TCJA expiration. Like annual gifting, it may become a more critical part of your overall plan as other exemptions decrease.
For business owners, there are specific strategies to consider. Grantor Retained Annuity Trusts (GRATs) enable individuals to transfer appreciating assets to beneficiaries with minimal gift and estate taxes, while the grantor retains fixed annuity payments for a set period. Family Limited Partnerships (FLPs) let family members jointly own and manage assets, which provides tax benefits and asset protection while still allowing parents to transfer wealth to heirs at a discounted value, often reducing estate and gift taxes. Both of these tools can help transfer equity or manage ownership transitions with minimal tax impact. These strategies can be powerful tools when it comes to keeping wealth in the family but require careful planning.
November is Long-Term Care Awareness Month, and it’s a great reminder to account for the often staggering costs of long-term care and its impact on estate planning. Protecting yourself and your family may include establishing a revocable trust, financial and medical powers of attorney, and HIPAA authorization. This creates a roadmap for your care and finances if you can’t manage them yourself.
As you can see, an estate plan has a lot of moving parts. Each one is unique, but none of them are one-and-done tasks. They require regular revisions based on changing circumstances and legislation. No matter what happens to the TCJA exemption level, now is the time to prepare for the future.
Whether you’re looking at lifetime gifts, charitable giving, or more complex planning techniques, the professionals at Prime Capital Financial are here to help you.
Sources
- https://www.kiplinger.com/taxes/gift-tax-exclusion
- https://www.irs.gov/newsroom/qualified-charitable-distributions-allow-eligible-ira-owners-up-to-100000-in-tax-free-gifts-to-charity
- https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes
Information presented here is meant for general informational and educational purposes only and should not construed as individualized advice. PCIA and Private Client do not offer legal or tax services. Always consult a legal or tax professional regarding your specific situation.
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