As we all know, the 2017 Tax Cuts and Jobs Act made many changes to how we look at tax planning. One change that has not received as much attention yet is the estate and gift tax exemption.
The 2017 tax reform raised the maximum exemption amount to roughly double the prior amount. In 2017, the exemption was $5.49 million and beginning in 2018 it became $11.18 million. The 2019 exemption is currently $11.4 million.
But this increase is not permanent. By Jan. 1, 2026, the exemption will retreat to 2017 levels — going back down to $5.49 million — unless Congress makes a change before then. Other plans have been put on the table. Just last month, the House drafted a plan that would sunset the estate tax exemption at the end of 2023.
Whether the estate tax exemption sunsets after 2023 or 2025, the time to begin planning is now. Instead of trying to navigate the complicated legislation and making significant planning changes on your own, the first step is to sit down with your accountant to determine if you do, in fact, have a taxable estate.
If the determination has been made that you have a taxable estate, do not sit on this information — start taking action immediately. For planning of this size and scope, it is important to work with an estate attorney, certified public accountant and finance adviser to determine your goals and options as you look to transition wealth to the next generation.
That’s the best way to answer key questions, such as: What is the right vehicle to transition your wealth? Is it gifting, trusts, or charitable giving?
These decisions will be unique to each individual. What holds true for everyone in this position is the need for a holistic approach, utilizing a team of advisers to discuss all options. In doing so, you can determine what makes sense personally and for your family legacy, with the help of a team you trust.
If you are younger than 75-years-old, there is a good chance you will see the transition back to the lower $5.49 million tax exemption. If you choose to do nothing to prepare, your estate or gift will be subjected to an undue tax burden that could be avoided through proper planning.
Since the estate tax and gift tax are now unified, individuals who believe they will live past the 2026 sunset can utilize the $11.4 million exemption on their own or can combine credits with their spouse without being subject to tax. If the sunset hits and the exemption is lowered before the estate is gifted, it will be locked in at an exemption level that is approximately $10 million less for a married couple than if the action was taken sooner.
In many ways, we can expect to see history repeat itself. Some may recall that in 2012, the exemption was $5.12 million with a sunset date of January 1, 2013. At the time, due to changing leadership, many were concerned the exemption rate would go back down. When the rate nearly did go down, those who waited until the last minute to make changes did so in a panic, in many cases rushing through important estate planning decisions. In the end, the exemption only continued to rise, but it was clear that many individuals were highly unprepared for the alternative.
Right now, individuals have the luxury of time on their side and can use that time to make a plan with a team of advisers and avoid any additional costs that can be incurred when rushing to avoid a tax.
Start with a few simple questions: What are your goals? What do you want to do with your legacy? The estate and gift tax exemption leaves room for many options, but only for those who plan ahead.