As highlighted in our recent Alert key benefit to families with taxable estates could go away. The Tax Cuts and Jobs Act (TCJA) incorporated numerous tax reductions into U.S. law, with one significantly increasing the ability of taxable estate owners to provide substantial gifts to others tax-free. However, the TJCA is scheduled to expire on December 31, 2025. Without a congressional extension, this sunset would revert the U.S. tax code to provisions prior to the law’s enactment.
You don’t want to wake up January 1, 2026 with a hangover that has nothing to do with the party you went to the night before. Here are 10 solid strategies for taxable estate owners that will help ensure a happy new year.
1. Utilize Increased Exemption Amounts
The TCJA significantly increased the estate and gift tax exemption amounts. For 2024, the exemption is $13.61 million per individual ($13.99 million per individual for 2025). This amount is set to revert to pre-TCJA levels (approximately $5 million, adjusted for inflation) after 2025. High-net-worth individuals should consider making substantial gifts before the exemption decreases.
2. Annual Gift Tax Exclusion
Take advantage of the annual gift tax exclusion, which allows individuals to give up to $18,000 per recipient, per year for 2024 ($19,000 per recipient as of 2025) without incurring gift tax. This can be an effective way to reduce the taxable estate over time.
3. Grantor Retained Annuity Trusts (GRATs)
GRATs can be used to transfer assets to beneficiaries with minimal gift tax implications. The grantor retains an annuity for a specified term, and any appreciation in the trust assets above the IRS assumed rate of return passes to the beneficiaries tax-free.
4. Irrevocable Life Insurance Trusts (ILITs)
An ILIT can be used to remove life insurance proceeds from the taxable estate. The trust owns the life insurance policy, and the proceeds are used to pay estate taxes or provide liquidity to the estate.
5. Charitable Giving
Charitable remainder trusts (CRTs) and charitable lead trusts (CLTs) can provide income to the donor or beneficiaries while ultimately benefiting a charity. These trusts can offer significant tax benefits, including income tax deductions and reductions in estate and gift taxes.
6. Dynasty Trusts
Dynasty trusts can be used to transfer wealth across multiple generations without incurring additional estate or gift taxes. These trusts can leverage the generation-skipping transfer (GST) tax exemption, which is also set to revert to lower levels after 2025.
7. Spousal Lifetime Access Trusts (SLATs)
A SLAT allows one spouse to create an irrevocable trust for the benefit of the other spouse and potentially other family members. This can provide access to trust assets while removing them from the taxable estate.
8. Family Limited Partnerships (FLPs)
FLPs can be used to transfer business interests or other assets to family members at a discounted value, reducing the overall taxable estate. Proper structuring and valuation are critical to withstand IRS scrutiny.
9. Review and Update Estate Plans
Given the potential changes in the tax landscape, it is crucial to review and update estate plans regularly. Ensure that documents reflect current laws and personal circumstances.
10. Consider State Estate Taxes
Some states like Illinois, New York, Massachusetts and 15 others have their own estate or inheritance taxes with lower exemption amounts than the federal level. Planning should take into account both federal and state tax implications.
Don’t wait, act now
Taxable estate owners and other high-net-worth individuals should act promptly to take advantage of the favorable estate and gift tax exemptions before they potentially decrease after 2025. Utilizing a combination of the above strategies can help minimize tax liabilities and ensure a smooth transfer of wealth to future generations. We recommend you consult with us or with your trusts and estates attorney now, to be prepared in case the beneficial provisions of the TJCA do expire.
