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Act Now Before the TCJA Estate and Gift Tax Exclusion Sunsets

Jun 6, 2024

Now is the time for high-net-worth clients to consider shifting ownership of millions of dollars in assets before the estate and gift tax basic exclusion is reduced on January 1, 2026. The upcoming expiration of the temporarily doubled exclusion creates a true use-it-or-lose-it situation for many, potentially resulting in substantial tax liabilities if action is not taken promptly.

The Tax Cuts and Jobs Act (TCJA), P.L. 115-97, essentially doubled the estate and gift tax basic exclusion, which currently stands at $13,610,000 ($27,220,000 for married couples). On January 1, 2026, the exclusion will revert to approximately $7 million ($14 million for couples). Taxpayers with taxable estates exceeding the exclusion amount, combined with certain past gifts, may face federal estate tax rates as high as 40%.

The Benefits of Acting Now

Taking advantage of the current estate and gift tax exclusion can result in significant tax savings, provide certainty in estate planning, and mitigate future uncertainties, among other benefits. Here are a few reasons why acting now is beneficial:

  1. Significant Tax Savings: Utilizing the doubled exclusion can potentially save millions in estate taxes. For example, transferring assets before the exclusion reverts could save up to approximately $5 million in estate taxes. This reduction is calculated based on the current exclusion amount of $13,610,000 ($27,220,000 for married couples) compared to the post-2026 amount of approximately $7 million ($14 million for couples). These savings are realized because any amount transferred under the higher exclusion is no longer subject to the estate tax rate of up to 40%.
  2. No Clawback: One of the most critical aspects of transferring assets now is the assurance that there will be no clawback. This means that assets transferred under the current higher exclusion are permanently shielded from future estate taxes, even if the exclusion amount is reduced when the individual passes away. This provides peace of mind and financial security while ensuring that the tax benefits gained from early transfers remain intact.
  3. Estate Planning Flexibility: Acting now allows for greater flexibility in estate planning and provides the opportunity to strategically allocate assets to heirs and beneficiaries, taking advantage of the current favorable tax conditions and avoiding potential complications and rush decisions closer to the 2026 deadline.
  4. Avoiding Future Uncertainty: As the political landscape and tax laws are always subject to change, by acting now, clients can mitigate the risk of unfavorable changes in tax laws and ensure that they maximize their current benefits without relying on potential future adjustments.
  5. Professional Guidance and Preparation: Starting the process early provides ample time to consult with your financial planner, estate attorney, and tax advisor. These professionals can offer tailored advice and strategies to optimize asset transfers and minimize tax liabilities.
  6. Future Appreciation Also Avoids Estate Taxation:  By planning now and transferring assets to trusts and other legal structures, the future appreciation of these assets can also avoid the estate tax. 

What Happens If You Wait?

While some may hope Congress will extend the doubled exclusion, the chances of a timely compromise are slim. Even if a deal is reached, it would likely not happen until late 2025. Waiting until then to see if legislation extends the increased exclusion could be detrimental. By then, you may not have enough time to prepare for transferring major assets or secure a top-quality lawyer to set up trusts.

Attorneys will likely be swamped with similar requests from other clients. Establishing trusts and other legal structures to receive transferred assets requires time and careful planning. As the deadline approaches, top-quality estate attorneys will become increasingly busy, making it more challenging to get the necessary legal assistance.

Prepare to Take Action

The impending reduction of the estate and gift tax exclusion presents a limited window of opportunity for high-net-worth individuals. The best course of action is to prepare now. By acting promptly, you can maximize your tax savings and ensure that your estate is well-prepared for the future. Setting up trusts and other necessary legal structures in advance allows you to take full advantage of the current exclusion before it reverts. Consult with your CRI advisor today to discuss your specific needs, get help leveraging the current tax laws before they change, and start the process to protect your assets effectively.

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