According to Robert Dietz, national director of Tax Research at Bernstein Private Wealth Management in Minneapolis, these tax issues are currently the top priority in client discussions.
Estate advisors are now planning year-end taxes, but while doing so, they face a significant concern, especially for their wealthy clients.
Starting this year, the 2017 tax changes allowed estate owners to pass on assets worth up to $12.92 million to their heirs without paying federal estate taxes. This number increased from $12.06 million in 2022.
Additionally, portability allowed married couples to double the basic exclusion amount (BEA). This strategy is ideal for husbands and wives anticipating federal estate taxes upon one of the spouse’s death.
Although one can inherit their partner’s assets tax-free, estate taxes might become due when the surviving spouse passes. IRS will compute the tax rate based on the estate’s overall value.
The said tax overhaul also raised the exemption to $13.61 million for individuals and $27.22 million for married couples next year. However, these numbers will revert to their 2017 rates by 2026 if Congress won’t intervene and introduce changes.
Unfortunately, essential parts of the 2017 Republican tax changes, like the higher federal gift and the aforementioned estate tax exemption benefiting affluent Americans, will end after 2025. It means by 2026, the limits will plummet by nearly 50%.
With upcoming changes looming, wealthy individuals and families should reassess their estate planning strategies.
Ashton Lawrence, director at Mariner Wealth Advisors in Greenville, South Carolina, says more people will face estate tax problems. He added that estate owners might end up with around 40% of their estate getting taxed.
On the other hand, Dietz emphasizes that the best strategy for couples anticipating the impact of the reduced exemption by 2026 is utilizing one spouse’s higher exclusion before the provision expires.
Some couples can consider splitting gifts evenly, using only half the current exemption. However, this move couldn’t help them make the most of the temporary higher limit. They have to give away more than half of their assets to benefit from the gift and enjoy the benefits of the exclusion.
While there’s roughly a two-year period until the rule changes, Dietz explained that specific estate planning methods need more than a few months or even a year to set up.
Their main point to clients is clear — don’t wait until 2025 to take advantage of the exclusion. Experts suggest married couples lessen their estate by donating through lifetime gifts to make the most of the increased exemption.
For clients who are hesitant about making irrevocable gifts now, an alternative is to take proactive steps before 2026 by establishing and funding a trust. While some are wary about this remedy, Dietz clarified that they can maintain control of the assets through a “promissory note” detailing a plan for reclaiming them.
However, before making significant gifts, individuals facing potential impacts should collaborate with their estate planning advisor to ensure liquidity for future needs.
A trusted advisor can guide you through various planning strategies, including donations inter vivos and trust funding. This approach proves effective in estate planning as it allows the beneficiary spouse ongoing access to the trust assets throughout their lifetime.
By enabling one spouse to have continued access to the gifted assets, married couples maintain financial security, easing concerns and allowing the use of a more significant exemption amount than they might initially consider viable.
While there’s a chance Congress might extend the estate and gift tax exclusion beyond 2025, it’s still being determined, given other legislative priorities.