As we approach the end of 2024, the impending reduction of the federal estate and gift tax exemption continues to be a key consideration for estate planning. The current exemption levels, set by the Tax Cuts & Jobs Act of 2017, remain at historically high levels of $13.61 million per individual and $27.22 million for married couples. These enhanced exemptions are scheduled to expire on December 31, 2025, reverting to lower levels unless Congress intervenes. While the political landscape is complex and fiscal priorities are in flux, it is possible that the new administration may choose to maintain the current exemptions rather than allowing them to sunset, though this remains uncertain.
However, the exemption reductions are scheduled to take effect automatically on January 1, 2026. With the scheduled exemption reduction approaching, the opportunity to leverage the current high exemptions will soon be lost. Estates exceeding the reduced thresholds could face a significant tax burden—40% on amounts over the exemption limit. Relying on legislative intervention is risky, and postponing action until late 2025 could lead to rushed decisions, missed opportunities, and potential service backlogs.
Strategic Planning Opportunities
● Lifetime Gifting Programs – Explore lifetime gifting strategies to maximize current exemptions, such as using accelerated gifting, spousal lifetime access trusts (SLATs) for indirect access, and dynasty trusts for transferring wealth across generations.
● Asset Valuation Planning – Plan asset transfers by targeting undervalued assets and using fractional interest transfers for potential valuation discounts. Ensure thorough documentation of current valuations to support gift tax positions.
● Income Tax Basis Planning – Plan your income tax basis by balancing estate tax savings with the risk of losing a step-up in basis. Explore hybrid strategies to maintain step-up for valued assets and assess existing irrevocable trusts for basis planning opportunities.
Practice Tips
As we anticipate potential changes in the estate tax landscape post-2025, it is wise to plan based on current laws while keeping room for adjustments. Estates exceeding the projected reduced exemption thresholds should conduct a thorough review in 2025 to allow ample time for strategic planning.
● Immediate Actions – Review and update estate plans, asset valuations, and succession plans, and revise trusts by early 2025.
● Documentation Requirements – Meticulously document all planning decisions, including the reasoning behind the timing of transfers. Ensure appraisals for hard-to-value assets are current, update governing documents for family entities, and review beneficiary designations.
● Communication Strategy – Develop a communication strategy by discussing wealth transfer goals with family, coordinating with advisors, and documenting planning decisions and their rationale.
