Estate Tax Exemption Sunset
The current federal estate tax exemption (as of 2024) allows for $13.92 million per individual ($27.22mm for a married couple) to be passed tax-free to heirs, but this elevated exemption is set to sunset at the end of 2025. If congressional action is not taken, the exemption could decline dramatically (to around $6 million per person and $12mm per married couple). For high net worth individuals and families, this potential shift could mean a steep tax bill to transfer wealth to heirs. However, there are steps that can be taken now before the 2026 decline to lock in the high exemption amount and mitigate future estate taxes.
There are a variety of estate tax planning strategies that can be implemented proactively. Here is an overview of some common strategies to consider:
Irrevocable Trust Strategies
One key avenue for preserving wealth lies in the strategic use of trusts. Placing assets into an irrevocable trust can reduce estate size, while still allowing access to income streams or even some limited principal. In this case, funding certain types of trusts ahead of the sunset can allow one to lock in the higher estate tax exemption while it’s still available.
- Spousal Lifetime Access Trust (SLAT). A SLAT allows one spouse to fund an irrevocable trust for the benefit of the other spouse and provide access to trust assets during life. This locks in the current estate tax exemption of $13.61mm, and also allows the assets to pass on to beneficiaries estate-tax free.
- Grantor Retained Annuity Trust (GRAT). A GRAT is used to transfer appreciating assets to beneficiaries with minimal tax impact. The grantor transfers assets to an irrevocable trust, which then pays a fixed annual annuity payment for the term of the trust. After the term ends, the remaining assets in the the trust pass to beneficiaries gift-tax free. They have the dual-benefit of freezing the value of an estate (lowering its taxable value) while also locking in the current estate tax exemption.
Gifting Strategies
- Annual Gifting. In 2024, an individual can gift up to $18,000 per person each year ($36,000 for a married couple) without it counting towards their lifetime exemption of $13.61mm. This means if a married couple has one child and three grandchildren, they can gift $144,000 per year to their family members without affecting their lifetime exemption.
- Lifetime Gifting. Larger gifts that are above the annual limit can also be made to intentionally utilize the full exemption amount, thus locking in the elevated limit while it’s available.
Other Estate Tax Exemption Strategies
- Asset Transfer Strategies. Tax-efficient asset transfers can also be considered by those looking to protect wealth amid uncertainty around the estate exemption. Families can consider shifting lower growth assets now while retaining assets with more appreciation potential. Careful assessment of what asset types can be strategically transferred in advance of the estate tax law changes can create long-term value.
- Charitable Planning. For the philanthropic-minded, charitable initiatives can also be used as a strategic tax-planning tool. Contributions to Charitable Remainder Trusts (CRTs), Donor-Advised Funds (DAFs) and Private Foundations enable families to contribute to meaningful causes while also acting as part of a broader tax-efficient estate planning strategy.
As the sunset of the estate tax exemption looms, high net worth families are presented with a unique opportunity to proactively shape their financial legacies. By getting creative with trust, gifting, and other strategies, they can navigate the complexities of a changing tax and estate landscape.
As always, it’s strongly recommended to engage with professional advisors to ensure a tailored approach that aligns with broader goals. Utilizing the gift and estate exemption is something that has immediate impact and cannot be used again in the future, so it’s important to carefully consider all potential strategies. Done carefully, families can secure a lasting legacy for generations to come.
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About Chris Stevenson, CFA®
Mr. Stevenson is an investment advisor representative of and offers investment advisory services through Forrest Financial Partners, LLC, a registered investment adviser offering advisory services in the State of Connecticut and other jurisdictions where registered or exempted. Tel: 860‐222‐0232.
Nothing in this article constitutes investment advice and all content is subject to the Legal and Disclaimer Policy of Forrest Financial Partners.
