Tax time is that one time of year when most people believe they have their personal finances in order. It’s also a good time to remind everyone that there are some big tax law changes on the horizon.
When the Tax Cuts and Jobs Act (TCJA) was passed in 2017, it overhauled the federal tax code by introducing new rules for both individuals and businesses.
Trouble is, most of the tax changes that targeted individual taxpayers—including revisions to estate taxes—are not permanent. Unless Congress acts, many of the laws are scheduled to sunset on December 31, 2025. At that time, the tax rates will revert to pre-2017 levels.1
“Don’t allow Uncle Sam to be your biggest beneficiary by failing to properly plan (for your estate),” writes Mick Owens in his popular book Diamond of Life, The Five P’s of Success and Significance. “My belief is that a little with dignity is much better than a lot that brings no honor to the God of the universe.”
Current Rules
The 2024 gift and estate tax exemption is $13.61 million. The IRS refers to this as a “unified credit,” meaning that any portion of the exemption you use to provide a gift for someone will reduce the amount you can use for the estate tax. For example, if you give away $1 million to beneficiaries, your overall estate exemption will be reduced to $12.61 million.
Remember that this rule applies to individuals, so a couple can get a total exemption of $27.22 million.2
Highest Tax Rate | Before 2017 | 2024 Rate |
|---|---|---|
Highest tax rate (on gifts and estates over the exception level) | Gift and estate exemption level that will return unless Congress acts | Gift and estate exemption in 2024. (Higher rate expires on 12/31/2025) |
40% | $5.49 million | $13.61 million |
A Proactive Approach
One approach to consider is acting today under current tax laws rather than waiting.
For example, let’s say you were in a position to give the entire $13.61 million to your children today. At a hypothetical growth rate of 4% over the next 10 years, that gift would increase to $20.1 million. But what if you passed away in 10 years? It is possible that a large portion of that $20.1 million would be taxed at 40%. If the exemption stays at $5.69 million, $14.7 million may be subject to estate taxes ($20.1 million minus $5.69 million). And don’t forget, 17 states and the District of Columbia currently levy an estate or inheritance tax.4
Tempting, But …
“There is no way my kids are ready to handle that kind of money.” That’s a common response we hear from clients when we begin discussing this idea.
That’s where a strategy that involves creating a trust can be used. A trust allows you to determine how assets will be invested and, more importantly, distributed. At the highest level, you could create a trust that outlines that the beneficiary will only gain access to a portion of the funds in a trust if the person meets certain milestones, such as graduating from a trade school or college.
“Better is a little with righteousness than great revenues without right.” Proverbs 16:8
When considering adding a trust to your financial strategy, it’s important to remember that trusts involve a complex set of tax rules and regulations. Before moving forward, we encourage people to work with a legal professional who is familiar with the rules and regulations.
If the tax laws revert to pre-2017 levels, don’t have a case of “woulda, shoulda, coulda.” You have plenty of time to consider your options and to develop a strategy that works for your family.
- TaxFoundation.org, December 1, 2023
- IRS.gov, November 9, 2023
- Schwab.com, May 18, 2023
- Urban.org, 2024
