A window of opportunity was opened for estate strategies as part of the 2017 Tax Cuts & Jobs Act. However, that window will shut in less than three years unless Congress decides to act and extend the current rules.
This opportunity is the estate and gift tax exemption. In 2023, an individual can gift up to $12.92 million during life or at death, or a combination thereof, without being concerned about federal taxes. However, all that will change on December 31, 2025, when the exemption amount is scheduled to drop back to the prior law’s $5 million cap, which, when adjusted for inflation, is expected to be more than $6 million.1
The Congress may also possibly see the sunset date as an opportunity to reset estate tax rules. Not so long ago, the estate tax exemption was much lower than $5 million, and judging Congressional support for the higher amount can be difficult.
Note that estate tax rules can change without notice, and there is no guarantee that the treatment of certain rules will remain the same. This article is for information purposes only and is not intended as a substitute for real-life advice. If you have a specific question, we encourage you to speak with your legal or accounting professional or contact us. We may be able to provide some guidance.
Who Needs to Act
For individuals and couples, the evolving estate tax laws serve as a good reminder to be proactive when it comes to creating an estate strategy.
One company surveyed 4,500 investors with at least $1 million in investable assets and found that around 40% did not have a formal inheritance plan. Worse, 50% had not shared where assets are held, how they intend to divide them, or how much they are worth.2
Before & After
Before looking at a few potential strategies to help manage an estate, let us take a look at a hypothetical couple with a combined net worth of $8 million. If they do nothing and live past 2025, they may have a taxable estate of up to $2 million ($8 million minus the $6 million estimated exemption). The estate tax is projected at 40% after 2025, so their family may face an estate tax bill of as much as $800,000.3
The estate tax exemption is considered a “use it or lose it” proposition. With our hypothetical couple, the proposition dropped before they were able to use the higher exemption amount. At some point, they might want to consider strategies to help pay the tax bill that may come due nine months after the date of death.
States with an Estate Tax4
Twelve states and the District of Columbia have estate taxes. Six states have an inheritance tax that is paid by the inheritor of an estate.
| Connecticut | 10.8% to 12% on estates above $9.1 million |
| Hawaii | 10% to 20% on estates above $5.5 million |
| Illinois | 0.8% to 16% on estates above $4 million |
| Maine | 8% to 12% on estates above $5.8 million |
| Maryland | 0.8% to 16% on estates above $5 million |
| Massachusetts | 0.8% to 16% on estates above $1 million |
| Minnesota | 13% to 16% on estates above $3 million |
| New York | 3.06% to 16% on estates above $6.1 million |
| Oregon | 10% to 16% on estates above $1 million |
| Rhode Island | 0.8% to 16% on estates above $1.7 million |
| Vermont | 16% on estates above $5 million |
| Washington | 10% to 20% on estates above $2.2 million |
| Washington, D.C. | 11.2% to 16% on estates above $4 million |
Using Trusts
When setting up a trust, the donor has various tools and choices at their disposal to address potential estate tax issues.
If you are considering adding a trust to help with your estate management, remember that trusts involve a complex set of tax rules and regulations. Before moving forward, consider speaking with your legal or accounting professional or please contact us. We may be able to provide some guidance on trust strategies that can address both current laws and what may happen if rules expire in 2025.
Gift Tax Exemption
Anyone can give another person a gift of up to $17,000 in 2023. Together, spouses can gift $34,000 this year. Anything higher is subject to the gift tax, which may be reflected in your lifetime exemption.5
The gift tax exclusion applies to each person who receives a gift. So, if you want to make gifts to five different people, you can give each of them $17,000 (or $34,000) without having to pay any gift tax. That’s different from the lifetime exemption, and it can play a role in your overall estate strategy.
Getting Perspective Developing an estate strategy on your own can be a challenge. We may be able point you in the direction of some key resources that can provide some general guidance.
- Forbes.com, November 4, 2022
- UBS.com, October 19, 2022
- PressEnterprise.com, November 7, 2021
- TaxFoundation.org, June 21, 2022
- Forbes.com, November 4, 2022
