Acting Now Before Historically High Estate Tax Exemption Sunsets

It’s unclear what the federal estate tax will look like after 2025, with the future of the exemption and many other provisions from the 2017 law provisions hinging on the outcome of the 2024 election. Given the uncertainty, a recent article from Bloomberg Tax Daily says succinctly, “Rich People Rush to Offload Wealth Before Estate Tax Break Drops.”

Estate planning attorneys advise clients impacted by the possible dramatic drop in the federal exemption to act now. Waiting until 2025 may lead to attorneys fully engaging with clients who began the process early and may not have time for latecomers.

Wealthy taxpayers have slowly started making gifts since 2018 to take advantage of the increased exemption, but estate planning attorneys have noted a significant uptick in activity. Planning for these gifts years before the sunset helps prevent “donor’s remorse” and ensures clients that their estate lawyers will have time for new returns, appraisals of assets and other associated tasks needed.

Last-minute plans could result in transferring too much or not the right assets, or they could leave parents without adequate assets to maintain their lifestyle.

The IRS published guidance in 2019 affirming that taxpayers can use the higher exemption amount and will not be penalized later if it changes. In other words, use or lose it.

To take advantage of the current exemption amount, several types of trusts should be considered. One of the most widely used is to create a Spousal Lifetime Access Trust (SLAT). This allows the donor spouse to still receive benefits from the assets, since their partner now controls them. However, if there is a divorce or the beneficiary dies, the donor loses access.

Another option is a Dynasty Trust, which benefits future generations. A taxpayer could also put a business asset with continued appreciation in the trust and still pay the income tax, further lowering the value of their estate. As dynasty trusts are intended to be in place for numerous generations, they need to be designed by an experienced estate planning attorney to conform to the law and have some flexibility as well.

A common strategy is adding a trust protector who can modify the agreement. The donor chooses how the protector can alter the trust, which may be adding or removing beneficiaries or tweaking the trust based on future changes to the law.

Caution must be used while planning to use the elevated exemption before 2026. For instance, if gifting a property like a home they live in, people should think carefully before taking action. Planning must consider whether the assets gifted or placed in trusts will be needed in the coming years, especially if the family’s assets are just at or less than the elevated amount.

Reference: Bloomberg Tax Daily (Feb. 28, 2024) “Rich People Rush to Offload Wealth Before Estate Tax Break Drops”