Anyone who wants to leave their estate to heirs needs to plan now so their wishes will be followed and, equally importantly, to minimize their estate’s tax liability. A recent article from The San Diego Union-Tribune asks, “Are you prepared for changes to estate tax laws? Here’s what you need to know.”
Because of the Tax Cuts and Job Acts of 2017, taxpayers who die in 2024 can pass up to $13.61 million federal tax-free to their heirs. In 2025, this amount will be adjusted for inflation. On January 1, 2026, the federal basic exclusion amount reverts to $5 million indexed for inflation. Many experts expect this to adjust to $6.5 to $7 million.
When calculating the total value of one’s estate, the IRS looks at all taxable gifts made while you are living, and all assets transferred upon your death. This includes the value of your home and its contents, retirement and investment accounts, life insurance not owned by an irrevocable trust, cash, annuities, boats, vehicles and bank accounts.
Estate planning must include tax planning. With the right planning, preserving the 2024 and 2025 higher exclusions may be possible through a lifetime gifting program. Let’s say the exclusion amount in 2026 is $7 million. You’d have to gift more than $7 million before January 1, 2026, to preserve the current exclusion amount.
Two years ago, in April 2022, the Treasury and IRS published Proposed Regulation Section 20.2010-1(c)(3) to limit certain types of gifts from qualifying for the current exclusion and restrict benefits of certain types of gifts if they were made within 18 months of the date of death. This regulation is still proposed and not final. However, you and your estate planning attorney must remember it during the estate planning process.
If making large, multi-million-dollar gifts is not possible without constraining the taxpayer’s lifestyle, there are other gifting strategies to use to take appreciating assets out of the estate over time. One way to do this is to make annual exclusion gifts every year. These are gifts that pass entirely tax-free. In 2024, a taxpayer could gift up to $18,000 per person to an unlimited number of people without paying any gift taxes.
Gifts to 501(c)(3) charities of any amount can be made tax-free with no gift or estate tax. This includes gifts made while you are living or after you have passed.
It is also permissible to pay an unlimited amount for tuition for an unlimited number of people, if the payment is made directly to the educational institution. These gifts may not include room, board, or fees. Similarly, one person can pay for another person’s medical expenses if the payment is made directly to the healthcare provider.
There are many ways to prepare for the coming changes to tax laws. What is right for one person may not be right for another, as everyone’s circumstances are unique. Discussing how to prepare for these changes with your estate planning attorney should take place soon, as it takes time to work out the details of a new estate plan and you can be sure estate planning attorneys will be very busy in 2025.
Reference: The San Diego Union-Tribune (April 30, 2024) “Are you prepared for changes to estate tax laws? Here’s what you need to know”