Federal Estate Exemption Sunset: Planning for Possible Changes in the Tax Code.
Estate taxes are an issue not normally a concern for many individuals, however, estate taxes have been a present issue at the forefront of many folks’ minds because of the possibility of the current exemption sunsetting at the end of 2025. The possibility of the exemption sunsetting is likely a very tangible concern regardless of who wins the election because of either a divided government not being able to agree on an extension or general government inaction. Being prepared for any possible outcome is challenging, however, individuals can update their estate plans and use tools like a Credit Shelter Trust, Irrevocable Life Insurance Trust, Spousal Lifetime Asset Trust, and gifting 13.61 million before the end of the period to take advantage of the full current exemption. This article will explore what the exemption is, the likely result from the election, and what tools a taxpayer can use to take advantage of the current exemption in case the exemption sunsets.
A provision of the 2017 Tax Cuts and Jobs Act “more than doubled the maximum that families can give their beneficiaries — either during their lifetime or as part of their estate — without incurring federal gift or estate taxes.” [i] Therefore, after 2017, a single taxpayer could claim a federal estate tax or lifetime gift exemption of 13.61 million dollars[ii] However, if Congress does not extend this exemption, then at the end of 2025, the exemption sunsets and returns to an estate tax or lifetime gift exemption around 7 million dollars.[iii]Now that we have the framework for the problem at hand, we will turn to the likely outcome based on the election.
A couple of possibilities exist based on the election result; the first scenario would be a divided government with Congress swinging to a red majority and Kamala Harris as president, which would likely lead to no action on the matter and a sunsetting of the exemption.[iv] If Congress were to swing blue and Kamala Harris were to win the election, we would probably see an acceleration of estate tax law changes for the purposes of raising revenues to pay for governmental expenditures. [v] Another scenario would be Donald Trump winning the presidency and Congress turning blue, which would again lead to likely no action occurring because of discontent between branches of government.[vi] Finally, if Congress is both red and Donald Trump wins the election, then we will see the best hope of the estate tax exemption being extended.[vii] Regardless of what eventuality occurs, the best course of action is to preplan your estate plan tools so as not to be taken by surprise if the exemption is sun-sets at the end of 2025.
There are a couple of ways that taxpayers can either take advantage of the exemption before it sunsets or take proactive measures to plan for how to prevent the taxation on the taxpayer’s taxable estate. Firstly, the obvious option would be to exercise the full amount of lifetime gifting by allocating the 13.61 million dollars in the form of gifts, which would eat up the entire exemption but would give the taxpayer 6 million more dollars in tax-free gifting compared to what would be allowed under the tax rules if the Tax Cut and Jobs Act sunsets.[viii]The other option would be to take advantage of estate planning tools, for instance, a Spousal Lifetime Access Trust allows one spouse to fund the trust for the benefit of the other spouse, but since the gift is made during the spouse’s lifetime, any appreciation is not counted for the purpose of estate taxes.[ix] Another such estate planning tool is a Credit Shelter Trust which applies “ when one spouse dies, a portion of their assets is placed in the trust and passes to beneficiaries when the surviving spouse dies. The assets and their appreciation are sheltered from estate taxes when the second spouse dies.”[x] While these tools can help escape estate taxes, there are many other implications that arise from using one of these types of trusts, which would need to be discussed with an estate planning attorney to see how they would affect your overall estate plan.
At the end of 2025, the likely result will be that the current federal estate tax exemption of 13.61 million will sunset, and the new exemption will be around 7 million. [xi] Early planning can prevent taxpayers from being taken by surprise if the exemption drops to a pre-2017 level, however, to prevent full taxation on your taxable estate means setting up complex trusts that would limit how much control the taxpayer would have over the assets they gift to the trust. All this leads to the conclusion that a likely storm is coming, and the only options will be to either take advantage of the 13.61 million dollar exemption now by gifting heavily in the next year or using advance estate planning tools. If the possible sunsetting of the federal exemption is a concern of yours, then contact your estate planning attorney to review your estate plan and see how it can account for the sunsetting of the 2017 Tax Cuts and Jobs Act’s lifetime gift and estate exemption.
[i] https://www.ml.com/articles/estate-gift-tax-exemption-sunset.html
[ii] https://www.ml.com/articles/estate-gift-tax-exemption-sunset.html
[iii] https://www.ml.com/articles/estate-gift-tax-exemption-sunset.html
[iv] https://www.marketwatch.com/story/the-election-will-have-a-huge-impact-on-your-estate-even-if-youre-not-rich-yet-why-you-need-to-act-now-ff2b454f
[v] https://www.marketwatch.com/story/the-election-will-have-a-huge-impact-on-your-estate-even-if-youre-not-rich-yet-why-you-need-to-act-now-ff2b454f
[vi] https://www.marketwatch.com/story/the-election-will-have-a-huge-impact-on-your-estate-even-if-youre-not-rich-yet-why-you-need-to-act-now-ff2b454f
[vii] https://www.marketwatch.com/story/the-election-will-have-a-huge-impact-on-your-estate-even-if-youre-not-rich-yet-why-you-need-to-act-now-ff2b454f
[viii] https://www.ml.com/articles/estate-gift-tax-exemption-sunset.html; https://ascent.usbank.com/private-capital-management/ascent-resources-and-insights/personal-legacy-planning/estate-tax-exemption-sunset.html;https://www.ml.com/articles/estate-gift-tax-exemption-sunset.html
[ix] https://ascent.usbank.com/private-capital-management/ascent-resources-and-insights/personal-legacy-planning/estate-tax-exemption-sunset.html; https://www.ml.com/articles/estate-gift-tax-exemption-sunset.html
[x] https://ascent.usbank.com/private-capital-management/ascent-resources-and-insights/personal-legacy-planning/estate-tax-exemption-sunset.html; https://www.ml.com/articles/estate-gift-tax-exemption-sunset.html
[xi] https://www.ml.com/articles/estate-gift-tax-exemption-sunset.html; https://ascent.usbank.com/private-capital-management/ascent-resources-and-insights/personal-legacy-planning/estate-tax-exemption-sunset.html; https://www.ml.com/articles/estate-gift-tax-exemption-sunset.html