Possible Federal Exemption Sunset: Who Should Prepare, and How?
A big change to federal tax law currently on tap after 2025 means some clients could lose the ability to shield millions of dollars from estate taxes. At issue is a potentially sharp jump in many estates’ tax liability to as much as 40% on amounts above exemption levels.
Not everyone has to worry about this – more on that in a moment. But for those who may be affected, Altair is ready to help ease your transition to the potential new tax environment.
The change, while not inevitable, has been set in motion. Lifetime estate and gift tax exemption thresholds were roughly doubled by the landmark Tax Cuts and Jobs Act of 2017 (TCJA), enabling families to give far more to their beneficiaries without incurring federal gift or estate taxes. But Congress built in a sunset provision to that portion of the act. The temporary increase will expire at midnight on December 31, 2025, unless lawmakers extend it or make it permanent.
Individuals are currently able to shield $13.61 million and married couples up to $27.22 million from estate tax liability in 2024. But those exemption figures are poised to revert to 2017 levels, adjusted for inflation, in 2026. That could be around $7 million for single taxpayers and $14 million for couples. Thus, those with estates above those levels would be most affected. High-net-worth individuals and families in that category with unused exemption may be well-advised to make one or more large gifts before the exemption is cut in half.
While the impact of this change could be significant from a tax perspective, we also want to caution clients not to make hasty decisions. To take advantage of the full exemption today, clients should first fully understand the amount of wealth needed to fund their own life needs before making non-revocable asset transfers to beneficiaries.
If your estate is sizable enough to be affected, we encourage you to reach out to your Altair service team to talk about options to evaluate with your attorney. It is important to do this while there is plenty of time for you and potentially your attorney to make changes. Many attorneys anticipate being stretched thin as we progress into 2025. So for those who are considering changes, it would be better to reach out sooner than later.
“For those with estates large enough to be impacted by this potential change, the key is to start looking at options now,“ says Anna Nichols, managing director and head of education for Altair. “You don’t want to be rushed in your decision-making or risk your attorney being overextended.”
Many strategies that could be utilized to benefit from the current exemption while it lasts require advance planning to ensure optimal success. So it behooves clients to review their plans and act sooner rather than later to ensure they don’t miss this wealth transfer opportunity.
After the exclusion limit reverts (assuming it does), traditional gifting strategies that use little or no exemption amount will still be an option and still be advantageous. These include:
- Annual exclusion gifts, at the continually increasing gift exclusion level; currently the allowed gift amount is $18,000 per recipient (or $36,000 from a couple) per year
- Bunching of annual exclusion gifts to fund 529 plans, also known as “superfunding” where you front load five years of annual exclusion gifts up to $90,000 ($180,000 per couple)
- Tuition payments or medical payments that do not count toward the annual gift limit when made directly to the institution
- Grantor retained annuity trusts (GRATs), if interest rates taper as expected, and sales to defective grantor trusts
- Qualified personal residence trusts (QPRTs)
- Irrevocable life insurance trusts (ILITs)
- Charitable split interest trusts, also known as charitable lead trusts (CLTs)
- Charitable gifts also can be used to transfer wealth (e.g., contributions to donor-advised funds (DAFs), qualified charitable distributions (QCDs), direct charitable donations)
Applicability of these strategies will vary by client and some of them cannot be combined, so we recommend connecting with your Altair adviser to discuss how the impending change will impact you and what are your best options.
Uncertainty about the future of federal taxes complicates planning. Congressional leaders and the next president are likely to work toward a deal on taxes ahead of the sunset deadline. Core features of the tax code will be on the table: Not just exemption limits but tax rates, the size of the standard deduction, how business income will be treated, and federal deductions for state and local taxes.
That makes the future tax code a big question mark. But advance planning should at least be able to help mitigate the impact of the exemption sunset.
The material shown is for informational purposes only and should not be construed as accounting, legal, or tax advice. Although we made efforts to verify the accuracy of the information, Altair Advisers cannot guarantee its accuracy. Please see Altair Advisers’ Form ADV Part 2A and Form CRS at https://altairadvisers.com/disclosures/ for additional information about Altair Advisers’ business practices and conflicts identified.