At the end of 2025, unless action is taken by Congress before that date, the federal estate tax exclusion amount is going to “sunset”. That means that it may nosedive to half of the current amount of $13,160,000. Most estate planning professionals predict that the exclusion will drop to around $7 million. That means that everyone who has been relying on the $13 million exclusion amount may suddenly find themselves with estate tax liability. The people that would be affected are those of single individuals with assets over $7 million or married couples with assets more than $14 million but less than $25 million.
One planning opportunity, however, is gifting. The current exclusion amount can be used now to make gifts, and those gift amounts will continue to be exempt from estate tax even if the estate tax exclusion does plunge to $7 million.
The IRS has issued a notice indicating that if gifts are made using the current estate tax exclusion amount, and the person making the gift dies at a time when the estate tax exclusion is less than it is now, there will be no “claw back” of the excess gift to make it taxable. For example, Joe decides to gift $13 million in assets to his children, an amount which is currently under the current estate tax exclusion amount, but then he dies when the estate tax exclusion amount is $9 million. The $4 million of the gift over the $9 million exclusion available at Joe’s death will not be dragged back to be taxed.
For example, Sally and Joe have a combined estate worth $18 million. They have not made any taxable gifts in the past – although they did made gifts under the annual gift tax exclusion amount ($18,000 in 2024). If Sally and Joe both pass away this year or next, there is no estate tax due on their estates because each has a $13 million exclusion amount, and the gifts were under the annual gift tax exclusion. However, if both pass away after 2025, each may only have an exclusion amount of $7 million, leaving $4 million subject to estate tax. With a 40% tax rate, that would mean $2.4 million in federal tax liability alone would be due.
I say may. Remember, the reduction is scheduled to take place if Congress does not act. I don’t have a crystal ball and cannot predict what Congress will or won’t do. However, estate planners and wealthy clients faced a similar situation in 2012 when the applicable exclusion amount was supposed to roll back from $3.5 million to $1 million on January 1, 2013. In 2012, people gave money away at a furious pace – but Congress, on the night before the rollback date, actually increased the exclusion amount to $5 million. This made many of the gifts unnecessary, and gifting remorse set in.
Those people with assets in the $8 million to $20 million range have a similar opportunity to reduce their estates, but is it worth the effort to undertake serious estate planning? What about gifting remorse?
For some, it definitely does not make sense; for others, this may be the time to act. The difference depends on what form that $8 million to $20 million is in, the age and earning potential of the individuals, and whether those assets are appreciating – not all $18 million estates are alike.
Let’s look at Sally and Joe again. Joe owns a successful business selling party goods. Since the end of COVID-19 isolation, people have loved having parties, and the business is growing. However, most of Joe’s assets are tied up in the business and he is putting earnings back into the business. Sally and Joe also own two houses that are paid off, a little cash, savings, and a small stock portfolio. Should Joe gift a portion of the business to their children? Maybe not. Here, the concern is liquidity – what assets will Sally and Joe have to continue their lifestyle if they give away a portion of Joe’s business? What happens if Sally or Joe needs to go to a nursing home? Unless there are sufficient income assets or liquid assets to cover those expenses, giving away a large share of Joe’s business may not be a good idea.
What if, instead, Joe created an irrevocable trust and put his business into that trust, with Sally as the primary beneficiary of the business’s income, and the children as the contingent beneficiaries. With proper planning, Sally could receive the income, but the value of the business would be excluded from estate tax liability, with the children eventually getting the business. This might take care of both the liquidity problem and still get Joe’s estate under the joint exclusion amount, presumably around $14 million. However, there could be obstacles to making this complicated strategy workable.
What is the moral of Joe’s and Sally’s story?
- One size planning does not fit all – work with a group of professionals you are comfortable with – estate planning is a long-term activity. This includes attorneys, accountants, and financial planners.
- Think about your future – how much money will you need down the road?
- No gifting remorse – make realistic projections.
If you have questions about your situation, please contact me to arrange a time to talk at kadcock@mcmillanmetro.com
