The federal estate tax exemption doubled seven years ago, offering an unprecedented amount of exclusion for estates and lifetime gifts. This tax has historically expanded, but, barring congressional action, is now set to be cut in half. What could this mean for you?
The Tax Cuts and Jobs Act of 2017 (TCJA) effectively doubled the gift and estate tax exclusion and the generation-skipping transfer tax limits. Due to Senate procedures, the TCJA will sunset on December 31, 2025. In 2023, the exclusion amount is $12.92 million per person and $25.84 million for married couples. This amount is subject to adjustment for inflation and should increase through 2025. Assuming nothing changes, starting January 1, 2026, the exclusion will decrease to $5.25 million, indexed for inflation (projected to be about $6.4 million at that time).
Lifetime gifting can be a tax strategy recommended by legal and tax professionals. There are several ways to lock in the exemption before the sunset. The simplest way to do this is by gifting assets to your loved ones now, rather than doing so through your estate. Making outright gifts will allow the gifts to grow in value in the recipients’ hands, which ultimately reduces your own taxable estate. There are ways to gift now and ensure protection from misuse, such as directing gifts into an irrevocable trust.
There are a range of other gifting strategies to consider. One option is to gift the remaining assets above the exclusion to a charity upon your death by creating a revocable or irrevocable trust and naming the charity as beneficiary. Another option is to create a Spousal Lifetime Access Trust (SLAT), which allows your spouse to access the funds during their life and pass any remaining funds on to their children.
Ways to give tax-free:
- Direct payments to medical and educational providers on behalf of a loved one
- Unlimited tax-free gifting to your spouse (for US citizens)
- Unlimited tax-free gifting to charitable organizations
- Annual gift tax exclusion
- Lifetime gift and estate tax exemption
Once you exceed the annual gift tax exclusion, you begin to eat into your lifetime gift and estate tax exemption. In some cases, electing not to make gifts from both spouses may be a strategic choice. Using one spouse’s exclusion and preserving the other’s could be a hedge against the unknown when it comes to future estate tax legislation. Remember, assets with the potential for appreciation are usually best for gifting, while highly appreciated assets may be best kept in your estate. By gifting now, you could guarantee your use of the larger exemption and not have to worry about the future appreciation of the gifts, as they would be outside of your current estate.
Take time to meet with your RMB advisor to ensure your gift and estate plans are well thought out and properly implemented. Remember, planning early and consulting with your advisor and tax professionals now is the safest way to ensure you’re able to take advantage of the current exemption.
The opinions and analyses expressed in this presentation are based on RMB Capital Management, LLC’s research and professional experience, and are expressed as of the date noted. Certain information expressed represents an assessment at a specific point in time and is not intended to be a forecast or guarantee of future results, nor is it intended to speak to any future time periods. This is intended for informational purposes only and not a recommendation to buy or sell any specific securities. RMB Capital makes no warranty or representation, express or implied, nor does RMB Capital accept any liability, with respect to the information and data set forth herein, and RMB Capital specifically disclaims any duty to update any of the information and data contained in this presentation. The information and data in this presentation does not constitute legal, tax, accounting, investment or other professional advice.
