The Estate Tax Exemption Could Fall After 2025. Are You Prepared?
If you’ve accumulated significant wealth throughout your life, your heirs could owe estate taxes after your passing. These taxes reduce the inheritance you planned to leave to your loved ones and can undermine the hard work you’ve done to set them up for successful futures.
Many families believe their estate won’t be large enough to trigger estate tax. However, an upcoming change in tax law may require you to reevaluate that belief. The change will effectively cut the estate tax exemption in half – making many more estates subject to tax.
What is the estate tax exemption and how could it change?
The estate tax exemption is the amount of cash, investments, real estate, or other assets you can leave to your heirs without triggering estate taxes. Any amount over the exemption is subject to tax, which is paid from the estate when the executor files the estate tax return after your passing.
The Tax Cuts and Jobs Act of 2017 effectively doubled the estate tax exemption from about $5.4 million to about $11.1 million beginning in 2018. After years of inflation adjustments, the exemption in 2024 is $13,610,000. Married couples can plan for an exemption twice this level due to a law that allows any unused exemption to pass to a surviving spouse at death – making the threshold about $27.2 million for a married couple in 2024.
However, the Tax Cuts and Jobs Act is scheduled to sunset at the end of 2025. If Congress does not act before that time, the estate tax exemption will revert to the previous level, adjusted for inflation. Estimates place the new threshold at about $7 million for individuals and $14 million for married couples.
What assets count toward the estate tax exemption?
Most assets are included in your estate, and therefore subject to estate tax at the time of your passing. The most common assets that make up estates are financial assets and real estate. Other assets which are included in your estate are business interests, artwork, collectables, and even some types of life insurance.
These assets are included in your estate at their current fair market value – not the price you paid for them. This distinction is particularly important if you have highly appreciated investments, real estate, or other assets.
The Estate Tax Exemption Also Applies to Gifts
When you give a gift or sell an asset to someone other than your spouse at less than its current market value, it reduces your available estate tax exemption. The rationale behind this portion of the tax law is that a person could avoid estate tax altogether by giving assets away during their life.
Fortunately, there is an annual gift tax exclusion in addition to the estate tax exemption. You can give up to $18,000 to any recipient in 2024 without owing gift tax or reducing your estate tax exemption. You and your spouse are permitted to each give this amount, doubling the annual exclusion for married couples. It is important to note that the exclusion applies to each recipient – meaning you can give gifts under $18,000 to as many individuals as you’d like without triggering the gift tax.
Methods for Reducing Your Exposure to Estate Tax
If your assets are near or above the estate tax exemption, there are several methods you can use to reduce the size of your estate and help your heirs minimize estate taxes. Five of the most common are:
- Give gifts under the annual exclusion to your intended beneficiaries. Yearly transfers allow you to move assets preemptively without triggering gift or estate taxes.
- Pay certain expenses directly for your loved ones. In general, direct payments of tuition and medical expenses are exempt from gift tax and don’t count toward your estate tax exemption.
- Contribute to a 529 plan for younger beneficiaries. Contributions to a 529 plan or custodial account are subject to the annual gift tax exclusion. However, once the assets are in the 529 plan or the beneficiary takes control of the custodial account, they are not included in your estate.
- Utilize certain types of trusts. Some types of trusts bypass your estate and allow your beneficiaries to draw income without triggering estate tax.
- Consider charitable gifts. Money you leave to a charity is not includable in your estate or considered a taxable gift. Additionally, charitable contributions during your life allow you to take advantage of income tax deductions while reducing the size of your estate. You can even donate appreciated stock or property to reduce your exposure to capital gains tax.
There are several other strategies you can use to reduce your exposure to estate tax and help your heirs keep more of their inheritance. An experienced financial advisor can help you evaluate your situation and find the right combination of solutions to minimize estate tax for your loved ones.
Get A Customized Estate Analysis from Brookstone Wealth Management
At Brookstone Wealth Management, our team will review your current assets and help you determine if your family will be subject to estate tax. If so, we can help you develop a strategy to reduce your exposure and help your family keep more of the money you’ve earned.
Our proprietary wealth management program – Financial Fingerprint™ – accounts for the most common barriers to financial success, including taxes. This nimble plan is the key to understanding your financial position and developing an effective estate plan.
To learn more about Financial Fingerprint™ or request a customized estate analysis, contact a member of our team today.