Estate Planning and the Looming Decrease in the Estate Tax Exemption

Date January 19, 2024
Authors Amy L. Dalen
Categories

Estate planning can be a difficult discussion because it forces people to consider their mortality and plan for their eventual death. But avoiding the topic won’t make it go away, and could result in big problems for loved ones left behind. So if you’re looking for a compelling reason to consider your estate plan, here it is: The estate tax exemption will be cut in half in 2026. Given the current exemption levels, that means that millions of Americans who might not expect it could soon have a taxable estate.

When the Tax Cuts and Jobs Act of 2017 (TCJA) was passed, it drastically changed estate planning by doubling the federal estate and gift tax exemption. The exemption is tied to inflation, bringing it to $12.92 million for 2023, and $13.61 million for 2024, meaning that an individual could shelter that amount of wealth before owing any estate taxes. That increase provided by the TCJA, along with the sunsetting of the increase in 2026, create the perfect scenario for taking time now to consider your estate plan.

As we enter the 2024 tax year, we have two more years of a generous exemption, and estate planning professionals are doing everything they can to ensure their clients are taking advantage of the exemption before it is too late. Here are some things we’re discussing with our clients:

Should You Engage in Lifetime Gifting?

Clients often ask me whether it makes sense for them to gift large amounts to their children, either directly or in trust, in order to “use up” their remaining exemption amount. Of course, each individual’s situation is unique, and I try to bring the conversation back to factors that should be considered:

  • The client’s age: The younger you are, the more life you have to live, and the greater the chances are that you will need more money to pay for your eventual retirement. If your children are still young you will likely have college expenses, weddings, and eventually, grandchildren to save money for. Contrast this with older wealthy people who want to help their children improve their quality of life or help pay for their grandchildren’s educational and medical expenses. An older couple is more likely settled in their annual spending and living expenses, and has a better understanding of what they are comfortable giving away, that is, an amount that won’t impact their lifestyle.
  • The individual’s total net worth: Individuals and couples who have a net worth that substantially exceeds the current unified exemption will likely benefit most by making large gifts. They should generally work with a financial planner to determine the assets they need to retain to maintain their lifestyle, which will help them determine the “extra” amount they can plan with. It is more difficult to plan for individuals who do not have a taxable estate, given the current exemption amount, but who will have a taxable estate when the exemption decreases. These individuals are stuck. If they gift away the full exemption amount, they may have nothing remaining, but if they don’t, their estate could be decimated by a large estate tax bill. These individuals might consider life insurance to replace the estate taxes that could be owed in the future. They should own the life insurance through an irrevocable life insurance trust to avoid increasing their total gross estate by the value of the life insurance death benefit.
  • Who (or what) the individual wants to benefit from their estate: It is not uncommon for my clients to say they want to divide their estate between their children and charity. Charitable planning changes the conversation, because we are no longer looking at methods to reduce the estate, but rather how we want to accomplish the charitable giving, including the tax benefits that can be achieved through various charitable giving strategies.

    • What Are Your Assets?

    Clients often ask me about creative estate planning strategies they could benefit from, but when I look at their assets I find they are mostly tied up in their principal residence and retirement accounts. These core assets can be difficult to plan with because they’re still using them. Sometimes a client has a family vacation home that could be placed in an irrevocable trust for the benefit of their children—if they are willing to pay rent to the trust each time they use it. Other times there will be family-owned businesses and discussions of succession planning, determining who will take over the business or whether it would be better to sell it.

    The most creative estate planning techniques, the strategies that many of our high-net worth families gravitate to, work best when the family has substantial investments—marketable securities, real estate, large businesses—that they are comfortable transferring to the next generation in order to preserve and grow generational wealth. However, creative strategies require more complex solutions, and greater compliance costs, and some of our clients simply don’t want to make their financial situations more complex than they already are.

    What Is Important to You?

    I try to tailor estate planning recommendations to each client, what is most important to them and what they are trying to achieve. Clients often surprise themselves when they realize that they don’t necessarily want to give up the significant amount of the wealth they worked so hard to achieve. They are looking for validation that it is okay not to engage in complex estate planning; not everyone is concerned about paying estate taxes.

    In fact, there are good, valid reasons for wanting to hold on to your wealth, even with the impending decrease in the estate tax exemption. You may have children with special needs, and you are concerned about a potential loss of state benefits, or concerned that someone could take advantage of them and the wealth they would have access to. You could be concerned that leaving substantial wealth to your children will be detrimental to their ability to grow into well-rounded and productive adults. You might prefer to spend your later years in an expensive assisted living facility and ensure you maintain sufficient wealth to pay those future expenses. Or you may simply want to spend and enjoy the wealth you worked so hard to build.

    Maybe you simply need to hear this: It is okay to choose not to give away your assets simply because the unified exemption is decreasing.

    What Should I Do Next?

    If you haven’t looked at your estate planning documents lately, I suggest you dig them out and review them. Consider any significant changes in your life: Did you get married? Divorced? Have kids? Move to a different state? All of these things have an impact on your estate plan and should prompt you to make updates to your current documents.

    I also recommend making a list of all your assets, including current estimated values, and all your debts. Get an idea of your net worth. If it’s a big number and you are concerned about future estate taxes, we can talk with you about the options available to mitigate the impact of those taxes.

    Finally, consider what issues are important to you right now. Is a child looking for help to buy a first home? Are you hoping to pass on the family business? Are you concerned about saving for retirement? Or saving for future college expenses? We can talk you through these issues and help you find solutions.

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