The Tax Cut and Jobs Act of 2017 (“TCJA”) made meaningful changes to the tax code which is set to “sunset” at the end of 2025. Come Jan 1, 2026, the historically high estate and gift tax exemption, among other provisions, will disappear and revert to pre-TCJA levels. While there is still time for Congress to act and extend the TCJA provisions, or otherwise amend the tax code, there are many things that can be done now to “lock in” the tax savings.
Changes to the Estate and Gift Tax Exemption
For 2023, the federal estate and gift tax threshold is $12.92 million per individual and $25.84 million for couples. In 2026, the estate and gift exemption will revert to pre-TCJA levels, expected to be approximately $6.8 million per individual or $14 million for a married couple.
The current high exemptions for lifetime gifts and estate tax create great opportunities to preserve your tax savings now. Once the exemption decreases, you cannot retroactively apply it, so it is a true “use it or lose it” scenario.
Strategic use of your annual gift exclusion can help you reduce the size of your estate and applicable taxes. You can gift up to $17,000 per year ($34,000 for married couples) to as many individuals as you wish and it won’t count against your lifetime exemption. If you aren’t taking advantage of this yearly exemption, and you were planning on making gifts to people, this is a good time to start that process and move that money out of your estate.
In addition, you can make accelerated gifts to 529 plans. Currently, you can accelerate five years of gifts to education accounts, up to $170,000 for a married couple. If you have several children or grandchildren, these amounts can add up and significantly reduce the size of your estate.
In lieu of gifting money to an individual, you may also make a direct payment to a medical provider or an educational institution on behalf of that person which is not considered a gift at all, meaning it does not use any annual exemption nor incur any tax. Gifts to charities are also tax-free.
To address concerns raised in light of the sunset date of the TCJA, the IRS clarified in a November 2019 Treasury Decision that, individuals who make sizable gifts now will not lose the tax benefit of the higher exemption amount that currently exists if they pass away after the sunset of the current exemption.
Irrevocable Life Insurance Trust (ILIT)
If you die owning life insurance, the death benefit and/or cash value of the policy can be considered as part of your estate for tax purposes and may be taxed if you exceed the estate tax exemption. To avoid this result, a life insurance policy can be transferred into an ILIT. Because the policy is owned by the ILIT, the policy benefit won’t be counted in your estate but will still provide funds to your beneficiaries.
Importantly, by transferring the policy into the ILIT, you are making a gift that will apply to your lifetime estate and gift tax exemption amount. The value of the gift depends on the type of policy. With a term life policy, the value of the gift is the unearned portion of the insurance premium (known as the Interpolated Terminal Reserve or ITR). The value of the gift for a whole life or universal life policy is the cash value of the policy. If you do not yet have life insurance or are considering buying an additional policy, the best way to maximize the tax advantages of an ILIT is to create the trust first, and then have the trust purchase the policy.
Spousal Lifetime Access Trust (SLAT)
A SLAT is a specific type of irrevocable trust created by one spouse for the primary benefit of the other, and if desired, may also include descendants as beneficiaries. The key advantage of a SLAT is that it removes assets from the married couple’s combined estate but the funds remain available to the married couple via the beneficiary spouse.
Notably, a SLAT may be used in the creation of a dynasty trust that benefits descendants. “Dynasty Trusts” allow grantors to create trusts which extend for many generations, however they are not permitted in all states. If properly structured, the trust can avoid estate tax and be exempt from Generation Skipping Tax as well. Generation-Skipping Transfer Tax (GST) – The Taxman Cometh and Keeps Coming!
While it is impossible to predict exactly what will happen with the exemption, it is important to discuss your options with an experienced attorney. There is still time to craft and execute a gifting plan and estate plan that will maximize the TCJA benefits and protect your legacy regardless of what occurs. Contact us today for a comprehensive evaluation of your estate plan.