The Tax Cuts and Jobs Act (TCJA) of 2017 brought significant changes to the federal gift and estate tax landscape by doubling the exemption amounts. Currently, the exemption is $13.61 million per individual, meaning only the wealthiest individuals need to be concerned about the estate tax. However, this provision is set to sunset at the end of 2025, potentially reducing the exemption amount to its pre-2017 levels of around $6 million or $7 million per person. For those with substantial estates, planning ahead for this sunset is vital to minimizing potential tax liabilities.

The federal lifetime gift exemption allows individuals to give away money or assets during their lifetime or at death without incurring federal gift and estate taxes. The current exemption of $13.61 million per person means that a married couple can collectively transfer up to $27.22 million to their beneficiaries tax-free. Any amount exceeding this threshold is subject to a 40 percent tax, paid by the giver. Given that less than 0.1 percent of estates paid any estate tax in 2020, the current high exemption has minimized the number of affected taxpayers.

With the sunset of the TCJA approaching, it is prudent for individuals with substantial estates to reassess their estate plans. If the exemption reverts to approximately $6 million or $7 million, many more estates will become taxable. To mitigate the impact of a reduced exemption, consider the following strategies:

• Using current gift exclusions — In 2024, individuals can give up to $18,000 per recipient without affecting their lifetime exemption. Making such gifts can reduce the taxable estate. Leveraging these gifts to purchase life insurance held outside the estate is an effective wealth transfer method.

• Irrevocable life insurance trust (ILIT) — An ILIT allows individuals to transfer life insurance policies out of their estate, thereby reducing the estate's taxable value. By placing life insurance in a trust, the proceeds are excluded from the estate, facilitating greater wealth transfer to beneficiaries.

• Spousal lifetime access trust (SLAT) — A SLAT provides the benefits of an irrevocable trust, with the added advantage of allowing distributions to a spouse. By naming children or other heirs as beneficiaries and applying the lifetime gift tax exemption to contributions, future appreciation on SLAT assets is shielded from transfer taxes.

• Charitable donations — Donating to charities can significantly reduce the size of an estate. Regular donations during one's lifetime or arranging for charitable gifts at death can create estate tax deductions, lowering the overall tax burden.

Given potential for significant tax implications, proactive planning is vital. By understanding the current rules and anticipating future changes, individuals can take steps now to preserve their wealth and ensure their estate plans meet their objectives. A knowledgeable estate planning attorney can evaluate your specific situation and help you determine which strategies will best mitigate potential estate tax liabilities.

For residents of Solano, Contra Costa, and Napa counties, Favaro, Lavezzo, Gill, Caretti & Heppell, PC offers expertise in establishing reliable and effective estate plans. Call us at 707-674-6057 or contact us online to schedule a consultation.