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Create a Strategy to Protect Your Wealth with Potential Estate Tax Changes Looming

Create a Strategy to Protect Your Wealth with Potential Estate Tax Changes Looming

April 16, 2024

At the end of 2025, portions of the Tax Cuts and Jobs Act (TCJA) are set to expire. Many changes will come with the sunsetting of many rules, including the possibility that federal estate and gift tax exemption levels will revert to pre-TCJA levels.

What’s changing?1

Currently, you are subject to federal estate tax only if your individual estate is worth more than $13,610,000 for individuals or $27,220,000 for married couples. These levels are more than double those of pre-TCJA estate exemptions ($5,490,000 for individuals and $10,980,000 for married couples).

If estate exceptions revert to pre-TCJA levels when portions of the TCJA expire at the end of 2025, more individuals and couples may be subject to federal estate tax when they pass away. If managing taxes on your estate is a priority, it may be time to start thinking ahead about your overall estate strategy.

Some basics about gift and estate taxes

How are gift and estate taxes calculated?1

The IRS explains it here: “The Gift Tax and Estate Tax provisions apply a unified rate schedule to a person’s cumulative taxable gifts and taxable estate to arrive at a net tentative tax. Any tax due is determined after applying a credit based on an applicable exclusion amount. A key component of this exclusion is the basic exclusion amount (BEA). The credit is first applied against the gift tax as taxable gifts are made. To the extent that any credit remains at death, it is applied against the estate tax.”

How did the tax reform law change gift and estate taxes?1

The tax reform law doubled the BEA for tax years 2018 through 2025 and adjusted the BEA for inflation. Under the tax reform law, this increase is only temporary. Thus, in 2026, the BEA is due to revert to its pre-2018 level, adjusted for inflation.

The projected inflation adjustments vary, but from a preparation standpoint, using $5,490,000 for individuals and $10,980,000 for married couples is one approach.

Estate strategies to lower taxes going forward

Assuming that exemptions will fall back to where they were, it may be time to think about how these lower levels might impact your existing financial and estate strategy and consider making adjustments to reflect the new limits.

Gifting

For 2024, the annual gift tax exclusion allows you to give up to $18,000 per year (or up to $36,000 if you’re married and filing jointly) per recipient without it counting toward your lifetime gift tax exemption or affecting your estate tax. Additionally, there is no limit to the number of people you can gift in a single year. This means that you could gift $18,000 (or $36,000 as a married couple) to each of your children, each of your grandchildren, or any other individual without reducing your available exemption. This is a yearly “use it or lose it” allowance.

Amounts over that per-recipient limit will count toward your lifetime gift and estate tax exclusion.

Furthermore, any income—or appreciation—after a gift is given will no longer be part of your estate. Gifting removes any future value from your taxable estate.

Also, keep in mind that you can pay educational expenses without them counting toward annual exclusions or lifetime limits if they are paid directly to institutions.

Benefits of gifting during your lifetime:

There are several potential benefits of gifting money to your heirs during your lifetime, even if it counts against your exemption.

  • Managing Estate Tax: By gifting assets while you’re still alive, you can manage the size of your taxable estate, potentially lowering your estate tax liability.
  • Gain control over asset distribution: You can choose who receives your assets and in what amounts.
  • Help heirs sooner: Your heirs can benefit from gifted assets sooner rather than later, which may help them buy a home, start a business, or pay for education.
  • Minimize potential conflict: Gifting during your lifetime can help manage potential conflict among your heirs after your death.

Tax advantages of gifting:

In addition to potential estate tax savings, there may also be some tax advantages to gifting during your lifetime.

  • Gifting assets that have appreciated: If you gift an asset that has appreciated in value, the recipient may receive it on a stepped-up basis. This means their basis in the asset would be the fair market value at the time the gift is given rather than your original cost basis. This may help them manage capital gains taxes if they eventually sell the asset.
  • Using your unified credit: Your lifetime gift and estate tax exemptions are combined into a single “unified credit.” You can use some of your unified credit to offset gift taxes during your lifetime, and the rest will be available to offset estate taxes at your death. By using some of your unified credit during your lifetime, you can lock in the current exemption amount, even if it is scheduled to decrease in the future.

In summary, strategic lifetime gifting can help you to manage estate taxes by utilizing the available exemption amount. The key benefit is removing future appreciation from your taxable estate by gifting earlier.

This article is for informational purposes only and is not intended as a replacement for real-life advice. Consult your tax, legal, and accounting professionals before modifying your tax strategy to take advantage of estate laws.

Creating a spousal lifetime access trust (SLAT)2

A spousal lifetime access trust (SLAT) is an irrevocable trust you can create for your spouse and to which you can gift all or a portion of your estate tax lifetime exemption.

Your spouse will have access to these assets during their lifetime since they will be the beneficiary. This grants you the benefit of removing assets from your taxable estate by using up your federal estate tax exemption amount. If you do this in 2024, you can fund the trust up to $13.61 million. Waiting until 2026 may lower the allowable contribution. Spouses can also consider setting up dual SLATs, which are designed to benefit each other.

There are downsides to SLATs, some of which may occur if you divorce or are predeceased by your spouse. It’s important to remember that setting up a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, we encourage clients to work with professionals who are familiar with the relevant rules and regulations and can offer guidance on various trust strategies.

Establish an irrevocable life insurance trust3

Life insurance proceeds generally aren’t taxable. However, after you pass away, these proceeds could become part of your estate, which is subject to taxation. To help manage this, you can create an irrevocable life insurance trust. This involves setting up a trust and transferring its ownership to another person. Such a trust is irrevocable because, in the future, you won’t be able to adjust it without the consent of the trust’s beneficiary.

Several factors affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder may also pay surrender charges and face income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.

Set up a charitable donation trust3

You can also attempt to manage estate taxes by transferring part of your wealth to a charity through a trust. There are several types of trust strategies, but two of the more widely known strategies are charitable lead trusts and charitable remainder trusts. Each has its own characteristics, but generally, by donating to charity through a trust, you are looking to manage the value of your estate.

Much like with a SLAT, transferring assets to a charity through a trust involves a complex set of tax rules and regulations. Before moving forward, we encourage clients to work with professionals who can offer guidance on various trust strategies.

Forming a family limited partnership3

You can set up a family-limited partnership if you have a family-owned business or property you want your children to own after you’re gone. To do this, one approach is to establish a general partnership and then make your heirs limited partners. You can be the general partner and still make all business decisions. Each of your partners will have a stake in your company or will own a portion of your assets. This may help manage the size of your estate and any taxes to eventually be owed.

This article is for informational purposes only and is not intended as a replacement for real-life advice on structuring a family-limited partnership. If this approach piques your interest, we encourage more discussions with your tax, legal, and accounting professionals.

Don’t put off discussing your estate strategy.

It’s possible that changes to gift and estate tax exemptions will require more individuals and families to reconsider their estate strategies. If you want to explore opportunities, there are steps you can take over the next 18 months. Even if exemptions revert to their previous lower levels, you can still take steps to help manage your estate.

As financial professionals, we are here to offer guidance on your estate and work with other professionals to create an estate strategy designed for your family. Please contact us if you have any questions or want to start discussing this topic before the rules change.

Aviance Capital Partners, LLC (“ACP”) is an SEC registered investment adviser located in Naples, Florida. Registration as an investment adviser is not an endorsement by securities regulators and does not imply that ACP has attained a certain level of skill, training, or ability. While information presented is believed to be factual and up-to-date, ACP does not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. Not all services will be appropriate or necessary for all clients, and the potential value and benefit of the ACP’s services will vary based upon the client’s individual investment, financial, and tax circumstances. The effectiveness and potential success of a tax strategy, investment strategy, and financial plan depends on a variety of factors, including but not limited to the manner and timing of implementation, coordination with the client and the client’s other engaged professionals, and market conditions. This should not be construed as specific investment, financial planning or tax advice tailored to an individual reader. ACP suggests that readers consult a financial professional, attorney or tax advisory professional about their specific financial, legal or tax situation. Past performance does not guarantee future results. All investment strategies have the potential for profit or loss, and different investments and types of investments involve varying degrees of risk. There can be no assurance that the future performance of any specific investment or investment strategy, including those undertaken or recommended by ACP, will be profitable or equal any historical performance level. The index and sector performance data appearing or referenced above has been compiled by the respective copyright holders, trademark holders, or publication/distribution right owners. Historical performance results for investment indexes or sectors represented are for illustrative purposes only and do not represent actual portfolio performance. The indexes or sectors represented generally do not reflect the deduction of transaction and custodial charges, or the deduction of an investment-management fee, which would decrease historical performance results. Investors cannot invest directly in an index. ACP makes no warranty, express or implied, for any decision taken by any party in reliance upon such index information.

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1 IRS.gov, February 2024. “Estate and Gift Tax FAQs”
2 SmartAssets.com, April 1, 2023
3 Forbes.com, February 2021