The Current Federal Gift and Estate Tax Exemption
The current regime of gift and estate tax laws was largely set by the Tax Relief Act of 2010. That law increased the lifetime exemption amount to $5M and introduced “portability” which allows a surviving spouse to take over the unused exemption of a deceased spouse.
In 2012, Congress revised the law to index the exemption amount to inflation and increased the maximum estate tax rate to 40%. This represents the permanent gift and estate tax regime: an individual exemption of $5M adjusted for inflation from 2011, a 40% tax rate, and spousal portability.
The Tax Cuts and Jobs Act of 2017 temporarily doubled the exemption amount, effectively making the limit $10M adjusted for inflation from 2011.
As of January 2024, the individual exemption amount stands at $13.61M. But, the TCJA provision will expire on December 31, 2025 and the exemption amount for 2026 will revert back to $5M indexed for inflation.
A Brief History
The Tax Cuts and Jobs Act of 2017 (TCJA) included a provision that dramatically increased the amount of wealth that families could transfer tax-free to succeeding generations.
This provision is one of many in the TCJA that was temporary due to the Senate’s rules against increasing the deficit beyond 10 years. Unless there’s an Act of Congress with a President’s signature, the lifetime gift and estate tax exemption will be cut in half as of January 1, 2026 – the "sunset”.
The Implications for Estate Tax Planning
Wealth transfer planning typically focuses on maximizing the value passed on to heirs and usually involves:
The cut in the federal exemption amount will increase many taxable estates creating a need for more liquidity at death. It will also decrease the opportunity to gift appreciating assets out of the estate. Families can mitigate those impacts by implementing a planning strategy before the sunset.
Wait and See?
Recent history underscores the impermanence of U.S. gift and estate tax law. Given this, some advisors suggest that families should refrain from investing time and resources into wealth transfer planning now, as the landscape may change with future legislation.
Others argue that families should proactively engage in planning that addresses the current landscape while building in flexibility to adapt to future tax law changes. They warn that the “Wait and See” approach may leave too little time to act once it becomes clear that action is necessary.
The pending sunset presents a significant “use it or lose it” scenario — at least $7M of tax-free gifting per donor that is currently possible will no longer be available after Dec. 31, 2025.
How Late is Too Late?
Wealth transfer planning based on the current high exemption sunsetting in 2026 will incorporate two or three key elements – a life insurance policy, a lifetime exemption gift (or private loan easily converted to a gift if desired), and an irrevocable trust established to hold the life insurance policy and/or the exemption gift.
Each of these elements has an inherent lead time that should be considered.
The Bottom Line: Don’t Wait
Even though changes to the federal estate tax appear to be off the table for now, there’s no reason to put a pause on wealth transfer planning. A "Wait and See" posture will only lead to another period of frantic assessment the next time Congress considers changing tax law. Instead, develop and implement effective wealth transfer plans that take advantage of the tools now available – including grantor trusts, valuation discounts, and short-term GRATs.
As 2024 progresses, we’re continuing to ramp up our conversations with clients and are actively engaging in life insurance planning to address their future estate tax liabilities. We work closely with other professionals including accountants, attorneys, and other advisors.
For more information about estate and insurance planning, please feel free to contact our office at 480.596.1525.
