5 minute read

Transfer Tax Changes Are Coming: Will It Impact Your Estate?

The 2017 Tax Cuts and Jobs Act that has benefited Americans will expire after 2025. Unless Congress takes action, tax exemption limits could get slashed in half.

Patrick Hicks

Patrick Hicks, @PatrickHicks

Head of Legal, Trust & Will

If you're someone who is planning your estate and has an estate plan in place, one thing we strongly recommend is to regularly review and update your plan as needed.

While oftentimes your estate planning strategy will shift and evolve based on your personal circumstances, sometimes it needs to change due to factors out of your control. Namely, laws and regulations that impact your plan.

Impending changes to transfer taxes is potentially one of them. This guide will discuss the upcoming adjustments to the 2017 Tax Cuts and Jobs Act (TCJA) that has brought about relief to many taxpayers over the last few years. The bottom line? If the pending regulatory changes will affect you, it is in your best interest to act now.

The Current State of Transfer Tax Laws

For high-net-worth individuals and their financial advisors, the landscape of estate planning strategies is about to shift once again. With adjustments to the Tax Cuts and Jobs Act (TCJA) of 2017, we face substantial changes that could have a ripple effect on how wealth is managed and passed down from generation to generation.

In 2017, the Tax Cuts and Jobs Act (TCJA) brought about substantial changes to how wealth is managed and passed down from one generation to the next. At the time, the lifetime estate and gift tax exemption was increased from $5.6 million to $11.18 million for individuals. Since then, the exemption was increased each year to adjust for inflation. For 2024, the exemption is a whopping $13.61 million, or $27.22 million for married couples.

As you might imagine, this is a hefty exemption that has offered a significant amount of tax relief for high net-worth taxpayers. In fact, these numbers represent a historical high with regards to tax exemptions for transferring wealth, a major touch point in estate planning.

Change is Coming: Impacts on Estate Planning

Unless Congress takes action, the increases that were made to the lifetime estate and gift tax exemption are scheduled to expire after 2025. The exemption amounts will be reset to what they were before 2018, adjusted for inflation.

If this takes place, the exemption will likely reset to the neighborhood of $7 million for individuals, and $14 million for couples in 2026.

This will be a drastic cut in half relative to the exemption limits in 2024, thus subjecting many more Americans. Our gift tax guide discusses how the tax rate on any gifts made over the exemption limit are taxed at rates between 18 to 40 percent. This is not something to ignore.

Will this reduction impact you, your loved ones, or clients that you have if you're an estate or financial planner?

Here are some possible implications for estate planning:

1. More Americans will be Subject to this Tax: Because the estate tax exemption threshold will be reduced by nearly one-half, this means that many more estates will be potentially subject to the tax.

2. Estate Tax Bills may be Heftier: Because the exemption threshold stands to decrease dramatically, this will also impact the tax rate brackets estates will fall in. The gift tax rate is 18 to 40 percent currently. For example, someone who currently falls in the 18 percent bracket (for any gift amounts made over the current threshold) may eventually fall into a much higher tax bracket.

3. Making Gifts will look Different: These changes will significantly impact how high net worth individuals plan to transfer their wealth. Typically, making gifts during one's lifetime has been a reliable strategy to help reduce the size of the overall taxable estate upon death. With stricter tax rules, individuals will have to rework their gift-giving strategy to maximize their tax benefits.

4. Existing Plans will need to be Reviewed: This is a significant policy change looming ahead, meaning that many Americans need to not only review but update their estate plans to adapt to new strategies if they wish to remain in line with their estate planning objectives.

To be clear, we do not yet know if or when Congress will make changes to these tax laws that impact wealth transfer strategies. Will the Biden Administration be tackling tax policies in 2024? Only time will tell, but estate planners do have time to act now in case changes do come soon.

Take Advantage of Current Tax Benefits While They're Still Here

If you believe these tax changes in the horizon may affect you, we're strongly recommending a proactive approach.

First, review your current estate plan and the upcoming changes to the regulation and understand how your current strategies may be impacted. Consider what amendments you may need to take. If you have been making gifting a part of your strategy, you'll need to evaluate what may need to be changed in light of the shifting tax rules. Of course, consulting your chosen professional is always recommended in scenarios when

Here are some possible strategies that you may find helpful:

Leveraging Lifetime Gifting

Lifetime gifting allows individuals to transfer assets to heirs tax-free, up to the current gift tax exemption limits. This strategy affords the dual benefits of reducing the size of an individual's taxable estate while enabling the recipient to benefit from the gifted assets immediately. With future reductions in exemption limits, maximizing lifetime gifts now becomes a pressing consideration for many.

Maximizing the Use of Irrevocable Trusts

Irrevocable Trusts offer a powerful tool for minimizing estate tax liability by removing assets from an individual's taxable estate. In the face of declining exemption levels, the use of these Trusts will become more prevalent. Advisors will need to carefully structure and fund Irrevocable Trusts to ensure they remain effective under the new tax laws. Learn more to determine whether or not an Irrevocable Trust is right for you here.

Consider the Spousal Lifetime Access Trust (SLAT)

The Spousal Lifetime Access Trust (SLAT) is a sophisticated estate planning strategy that could prove particularly advantageous given the oncoming adjustments to tax regulations. A SLAT enables a spouse to establish a Trust for the benefit of their partner, thereby transferring assets out of the estate while still ensuring financial support for the Beneficiary spouse.

This tool not only leverages the gift tax exemption before potential reductions but also preserves access to Trust assets for family needs through the Beneficiary spouse. Further, by placing assets in a SLAT, they are shielded from future estate taxes and potentially creditors, enhancing the protective barrier around the family's wealth. SLATS could strike a great balance between generational wealth transfer and financial security in the now.

Crafting Flexible Estate Plans

Tax laws are constantly on the mend, which can be quite the headache for estate planners. You can turn this into an opportunity by making your estate plan more flexible and fluid. Craft a plan that can adapt to changes in the future, and make it a practice to review and update regularly.

Craft Your Resilient Estate Plan Today

Transfer tax laws are poised to undergo significant changes, and the impact on high-net-worth individuals and their estates cannot be overstated. Only time will tell if Congress will take action, or if they will let TCJA sunset and drastically change how individuals plan to transfer their wealth.

By staying informed, seeking professional advice, and reassessing current estate plans, individuals can position themselves to weather the changing tax environment.

These changes are set to take place in the next couple of years unless Congress takes action otherwise. In the face of uncertainty, it means that the best time to act is now. This year is a great time to take advantage of the current tax rules that are beneficial. The lifetime estate and gift tax exemption is at a historic high, making it prime time to strike before they will possibly get cut in half.

Are you looking for the perfect solution where you can have peace of mind knowing your estate plan is in place, but where you can stay nimble and readily review, strategize, and update it as needed? Trust & Will is your answer. Our trusted platform allows you to create, store, and maintain your estate planning documents online with bank-level security. Find out more about what Trust & Will has to offer for you today.

Is there a question here we didn’t answer? Browse more topics in our learn center or chat with a live member support representative! 

Trust & Will is an online service providing legal forms and information. We are not a law firm and we do not provide legal advice.