New changes are coming for estate and gift tax exclusions. Unless Congress takes action, the current limits are set to sunset at the end of 2025. While that timeline might seem far away, for some business owners and high-net-worth individuals, the time to act is now.
The Tax Cuts and Jobs Act (TCJA) increased the threshold to $25.84 million in 2023 for married couples and $12.92 for individuals. However, we’re expecting to see exclusions drop to pre-2017 levels of $6.8 million for individuals in 2026, adjusted for inflation. Likewise, the current 40% maximum gift and estate tax rate will increase to 45%.
If you think you’ll be impacted by the gift and estate tax sunset, here are a few things you can do:
Take advantage of the lifetime gift and estate tax exemption now. While many people develop estate plans to leave gifts to their heirs upon their death, the easiest way to lock in the current higher exemption is to make gifts now. If your wealth would exceed the $12.92 million exemption, making a gift prior to the 2026 change in limits would not only save on taxes, but it would also allow more time for investment growth, so heirs could see a greater benefit in the long run.
Leverage annual exclusion gifts. In 2023, you can give up to $17,000 in a single year to as many individuals as you want. If you’re married, you and your spouse could make gifts separately, allowing up to $34,000 per individual without gift tax implications. By gifting now, you can reduce your taxable estate.
Create a trust. There are a variety of trusts that can be set up for beneficiaries, and a financial advisor can guide you to the solution that’s best for you. A straightforward strategy is to create an irrevocable trust, which can’t be modified or terminated, but does offer significant tax benefits. Gifts to the trust can grow tax-free and then be distributed to beneficiaries without the burden of the federal estate tax.
Pay tuition or medical expenses directly. Another way to reduce your taxable estate is to pay education institutions or medical providers directly. You can make unlimited payments without affecting your annual exclusion gift limit. This is an excellent way to help loved ones with high medical costs or tuition payments.
Seek professional guidance. Estate planning laws are complex, and tax laws are ever-changing. A financial advisor can help you identify the best strategy for your specific situation.
While the estate tax sunset won’t affect everyone, this is still a good reminder to update your estate plan or create one if you haven’t yet. Taxes have a critical impact on whether you get to keep what you earn, and it’s wise to have a professional in your corner to offer counsel on complicated changes in laws.
At Willis & Machnik, we strive to be your partner for complete wealth management. Contact us to learn more about how we can help you develop an estate plan and preserve your wealth for the future.