Wealth Planning Commentary – October 14, 2024

Income Tax Planning for the TCJA Sunset

Last week, we explored the income tax implications of the Tax Cuts and Jobs Act (TCJA) sunset. Today, let's turn our attention to estate tax considerations. The TCJA, enacted in 2017, will expire at the end of next year. While Congress may extend it, planning for the current law is a prudent approach. The most notable change is the gift and estate tax exemption reduction from $13.61 million per individual to approximately $7 million. This reduces the exemption for married couples from about $27 million to $14 million. Any amounts exceeding the exemption will face a 40% estate and gift tax rate. Where feasible, “locking in” today’s higher exemption through direct or trust-based gifting presents a strategic opportunity. It’s not necessary to transfer the full exemption amount. Even using one spouse’s exemption and transferring anything over $7 million takes advantage of the current higher exemption before it potentially decreases. Several common concerns arise when considering gifting strategies: The fear of running out of assets You can address this concern by assessing how much wealth is needed to sustain your lifestyle while maintaining a margin of safety by engaging in the wealth planning process. Trust Structures like Spousal Lifetime Access Trusts (SLATs) or Intentionally Defective Grantor Trusts (IDGTs) offer ways to preserve some control over gifted assets and act as a safety net if depleting assets are a concern. Concerns about financially irresponsible heirs "Control from beyond the grave" is possible through trust provisions defining distribution conditions, including amounts and timing. Trusts can also include distribution provisions for specific needs, such as education or buying a home. Incentive-based strategies like matching an heir's salary can encourage financial responsibility. It’s important to balance these controls with the legacy you want to leave behind. Uncertainty about who to gift to or how much Relatively young and wealthy individuals may feel uncertain about making large gifts but want to take advantage of the exemption. Certain states allow "flexible" trust provisions, enabling adjustments to inheritance amounts or removing beneficiaries if needed. While you don't need to transfer assets immediately, we recommend getting trust documents in place as soon as possible. As 2026 approaches, securing legal counsel may become more challenging. If it appears the exemption will expire toward the end of 2025, the transfer of assets can happen swiftly—though assets not priced daily may require a third-party valuation. In summary, the TCJA sunset poses challenges but also offers opportunities for strategic estate planning. Beginning the process now helps maximize the current high exemptions and lower tax rates. Every family’s situation is unique, so working closely with wealth managers and estate attorneys to develop a customized plan is essential. Please reach out to your Wealth Manager with questions about estate planning.