The Tax Cuts and Jobs Act (TCJA), enacted in 2017, brought significant changes to the realm of taxation, particularly concerning gift, estate, and generation-skipping taxes (GST). One of the most substantial modifications was the increase in the exemption amounts for these taxes, providing substantial break to many wealthy Americans. However, these changes were not permanent. Without further congressional action, the sunset provision in the TCJA will cause the exemption amounts to revert to approximately $7 million per person and double for married couples, which was the exemption amount prior to the TCJA, adjusted for inflation. This article explores the implications of this impending change and offers insights on how to prepare for the potential shift in estate tax policy.
Understanding the Current Exemption Amounts
Under the TCJA, the gift, estate, and GST exemption amounts have been set at a generous $12.92 million per person, with a doubling provision for married couples. This means that, as of now, a married couple can potentially shield nearly $26 million from these taxes. These historically high exemption amounts have provided a considerable buffer for many families against estate tax liabilities.
The Impending Sunset
However, these generous provisions come with an expiration date. Unless Congress takes further action to extend or modify the TCJA, the current exemption amounts will sunset, and the estate tax exemption will revert to roughly $7 million per person (with inflation indexing applied). This change, which will be effective after the sunset at the end of 2025, is significant as it will reduce the exemption from estate taxes by almost half.
The Need for Planning
Given the impending sunset, individuals and families with substantial assets should consider proactive estate planning strategies to safeguard their wealth from potential tax implications. Here are a few steps to consider:
- Review Your Estate Plan: Revisiting your estate plan in light of the changing exemption amounts is crucial. Ensure that your plan aligns with your current financial situation and goals. This may involve making updates or revisions to maximize tax efficiency.
- Gifting Strategies: With the current high exemption amounts, consider taking advantage of gifting opportunities to transfer wealth to your heirs while the favorable exemptions are in place. Lifetime gifting can help reduce the overall value of your estate subject to taxation.
- Trusts: Explore using trusts to protect your assets and ensure they are distributed according to your wishes. Irrevocable trusts, such as grantor retained annuity trusts (GRATs) and qualified personal residence trusts (QPRTs), can be valuable tools in minimizing estate tax liability.
- Seek Professional Advice: Estate planning can be complex, especially with changing tax laws. Consulting with experienced estate planning attorneys and financial advisors can provide valuable guidance tailored to your specific circumstances.
The sunset provision in the TCJA has significant implications for estate planning, particularly in the context of gift, estate, and generation-skipping taxes. To protect your estate from these changes, it is crucial to stay informed, reassess your estate plan, and implement effective strategies to mitigate potential tax liabilities. Proper planning can help you preserve your hard-earned assets and ensure they are distributed according to your wishes. Even if you are not near these thresholds, you and your heirs can benefit from estate planning.
If you would like help with your estate planning or understanding how these tax law changes affect you, schedule a time to meet with us today!