The Tax Cuts and Jobs Act (TCJA), passed in 2017 as one of the largest changes to U.S. tax law in decades, will sunset after 2025. The TCJA included many income tax provisions such as lower income tax brackets, a standard deduction and a cap on state and local tax deductions, among others. It also increased the charitable deduction against adjusted gross income from 50% up to 60% for cash contributions. Most dramatically though, it increased the unified gift and estate tax exemption amount to an unprecedented level, which is what we will focus on here.
The Act included a “sunset” provision for the individual, estate, gift and generation-skipping tax changes. This provision is a clause in the legislation that indicates a certain date when the tax law changes will end and revert to pre-TCJA levels. This date is set for January 1, 2026, and while Congress could act before this sunset occurs, it is worth considering taking advantage of this planning window now while it is still open.
Gift & Estate Tax Exemption
The lifetime gift exemption is the total amount of money an individual can give before being subject to a 40% gift tax. In 2024, under current TCJA provisions, the exemption is $13.61M per person or approximately $27.22M per married couple. This amount can be transferred during life or at death, while being sheltered from gift and estate tax. Any gifts made or residual estate value above the exemption amount are then subject to the gift and estate tax at 40%. Once the sunset occurs, the exemption amount is scheduled to be cut in half, so the total exemption per person would be closer to $7M and $14M per married couple, depending on inflation. Meaning, if your wealth planning model shows that you will have an estate value of more than $7M and $14M at death, you are likely to have to pay estate taxes on the excess.
For those with taxable estates looking to tax-efficiently transfer wealth, 2024 and 2025 represent an opportunity to take advantage of the higher exemption amount while it still exists. There is no penalty or “claw-back” that will occur when the higher exemption amount is used and transfers are made before the TCJA sunsets.
Gifting Considerations
Gifting strategies are highly personal and dependent on each family’s circumstances and goals. Ancora’s Estate & Wealth Planning team members are happy to discuss or model any of these ideas or others as a part of your estate and wealth transfer strategy. In short, the goal is to give gifts while the higher exemption is in place, and in doing so, remove the current and future appreciated value of the asset from the taxable estate.
Keep in mind that some forms of gifting do not count towards the exemption amount and require no tax filing. As examples:
- Annual Exclusion Gifts: Individuals can give up to $18,000 annually to another individual without needing to file a gift tax return or eat into their lifetime exemption. As an example, a married couple (two individuals) with three married children (6 individuals) and four grandchildren could gift up to $360,000 this year. And, if annual exclusion gifts are made to 529 Plans, up to 5 years’ worth can be funded all at once.
- Direct payments made on another’s behalf to educational institutions for tuition or directly made to medical institutions for medical needs also do not eat into the gift exemption nor do they count as annual exclusion gifts.
In addition, we have outlined a few strategies to consider now as ways to utilize the current exemption level and transfer wealth efficiently before sunset occurs.
For those ready to make gifts to the next generation:
- Assets can be given outright to beneficiaries. A gift tax return should be filed when the amount exceeds the annual exclusion, but no tax is due until the lifetime exemption amount is surpassed.
- Irrevocable Trusts allow for the permanent gifting of assets but act as an entity with some protection and guardrails in place for beneficiaries.
For those hesitant to lose control of the gifted asset:
- Spousal Lifetime Access Trusts allow one spouse to gift assets to a trust giving a lifetime interest to the other spouse and the remainder of interest to the next generation. These trusts are irrevocable.
For those with assets expected to appreciate rapidly:
- Grantor Retained Annuity Trusts allow for an asset to be gifted to an irrevocable trust for a set period during which the Grantor receives an annuitized income stream. At the end of the period, any excess is transferred to beneficiaries.
For those who are charitably inclined:
- Donor Advised Funds are charitable investment accounts established at a public charity. The client can make donations to the account, take an immediate deduction and make grant recommendations to qualified charities of their choice at an undefined pace over their lifetime. The fund can be managed by the next generation into the future as well.
- Charitable Trusts are irrevocable arrangements that generate an income stream to the client or other beneficiaries for a determined period with the remainder of assets being donated to specific charities.
For those who prefer to focus on wealth replacement for estimated estate taxes rather than gifting assets now:
- Irrevocable Life Insurance Trusts are set up to own and benefit from a life insurance policy on the life of the individual who set it up and are not includable in the individual’s taxable estate. The premium payments to the trust are considered gifts and at death, the insurance proceeds are resources to the trust’s beneficiaries.
These are some, though certainly not all, ideas that our financial planners use with clients to mitigate estate tax implications. With the TCJA sunset on the horizon, we encourage all clients to review their financial plan if they have not recently or reach out to their Ancora representative to schedule time with our Estate & Wealth Planning team.