3 Estate Planning Opportunities | “In the year 2025”

March 30, 2023

4 minute read -The 2017 passage of the Tax Cuts and Jobs Act (TCJA) doubled the lifetime exemption available to high net worth clients/individuals ($12.92M in 2023), reducing the number of estates subject to the estate tax. Barring legislative action, that exemption will revert to pre-TCJA numbers beginning in 2026, potentially exposing many more estates to taxation at death. Individuals should lock in higher exemptions. Now is the time to plan to take advantage of these increased exemptions.

The 2020 election and legislative proposals in 2021 led to a flurry of year-end planning. A recent tax court case, Smaldino v. Commissioner, shows the perils last minute planning — the taxpayer ended up owing over $1,000,000 in gift tax that could have been avoided with timely planning. Here are three strategic thoughts for high net worth estate owners. 

1. Outright gifting to irrevocable trusts of gift tax exemption •

Under current law, the federal estate and gift tax exemption is $12.92M in 2023 ($25.84M for a married couple). • Wealthy clients should consider gifting now because, without legislative action, the exemption will drop to $5M (before inflation indexing) on 1/1/2026. • If a married couple is not able to fully utilize their joint exemption (i.e., $25.84M in 2023), it may be prudent to consider having one spouse fully use their exemption rather than gift-splitting, so that the couple can at least partially benefit from the current higher exemptions. • For additional flexibility, or to alleviate concerns about loss of control or future access to gifted assets, consider spousal lifetime access trusts (SLATs). Act now:  Learn more about how trustowned life insurance may enhance planning goals by providing an income-tax-free source of liquidity and a favorable internal rate of return on the life insurance death benefit.  A gifting module can help illustrate the potential benefits of lifetime gifting as well as how to use life insurance inside irrevocable life insurance trusts (ILITs).

2. Getting prepared — drafting irrevocable trusts now to avoid rushed planning and missed opportunities •

With the sunset looming, wealthy clients may want to utilize all of their exemption before the sunset on 1/1/2026—having trusts in place now can allow for comprehensive planning and proper execution. • If you want to gift assets that are difficult to value, you may also want to contact an appraiser now to discuss starting the valuation process. Act now: If you are not already working with a law firm,  now is a perfect time to find an attorney who’s expertise is estate planning council. We can assist you with such an effort. https://www.naepc.org/designations/estate-planners/search#spec/All;%20https://www.aaepa.com/member_directory/

3. Putting personally owned life insurance in place now, and planning for a potential transfer later •

Considering the Biden administration’s tax proposals, high-income earners, particularly those earning more than $400K annually, may find the income tax benefits of life insurance.more attractive than ever. For these individuals, personal ownership structured for either (1) maximum cash accumulation potential to generate income-tax-free supplemental income in the future or (2) maximum death benefit may be desirable. • If it appears that Congress will not act to make the current estate tax exemptions permanent, the insured/owner can consider either of the following: – Gifting the policy to an ILIT at a future date (note the gift of a policy on the donor’s life is subject to estate tax inclusion for three years following the gift), or – Selling the policy to an ILIT for full and adequate consideration (which should avoid the three-year rule), provided the sale meets an exception to the transfer for value and reportable policy sale rules. Act now: If a future transfer of the policy to a trust is likely, for survivorship policies, we may consider discussing an estate preservation rider (designed to provide additional death benefit for the first four policy years to offset some risk of estate tax inclusion), as well as the possibility of using a standby trust.

As of March 2023: This material does not constitute tax, legal, investment or accounting advice and is not intended for use by a taxpayer for the purposes of avoiding any IRS penalty. Comments on taxation are based on tax law current as of the time we produced this material.

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