Wealthy taxpayers are rushing to take advantage of the increased inheritance tax exemption, which is likely to expire at the end of 2025.
The Republicans' 2017 Tax Cuts Act doubled the estate tax exemption, but it did so in anticipation of a downfall in 2025. Those with gifts or estates in excess of the exemption amount, which will be approximately $13.6 million per person in 2024, will be subject to a 40% transfer tax.
What inheritance tax will look like after 2025 is uncertain, and the future of the deduction and many other provisions of the 2017 law will depend on the 2024 election. Republicans have long criticized the estate tax and have made multiple bids to abolish it completely, but Democrats see the tax as a way to raise revenue from the ultra-wealthy.
Given the uncertainty of future exemption amounts, wealthy individuals are scrambling to reduce the value of their estates and make large gifts over the next two years.
“We're maxed out” on taking advantage of the increased exemptions, said Emily Plocki, a real estate attorney with Venable LLP. “It's now or never.”
Laura Hinson,
“If people want to wait until 2025 to transfer money and take advantage of the exemption, it could be difficult to find a competent attorney to draft a new trust document,” Hinson said in an interview. Stated.
Expensive gifts and projects
Hinson said wealthy taxpayers began making gifts gradually after 2018 to take advantage of the expanded exemption, but activity has now increased significantly.
Estate lawyers say planning these gifts years in advance can avoid donor regrets and ensure time for new returns. Some assets may require an appraisal.
In addition, real estate attorneys often create cash flow plans for their clients to ensure they have enough money to support themselves after receiving the gift, Hinson said.
“Last-minute planning can result in moving too many assets or not moving the right assets,” Hinson said. “Or mom and dad may not have enough assets to make ends meet.”
2019 IRS guidance states that taxpayers can use a higher deduction amount and not be penalized if it is changed later.
“This is a use it or lose it scenario,” Procki said. “To make the most of this opportunity, you should consider what your 2026 forgiveness amount will be and make a large gift.”
Preparing for sunset
Inheritance tax lawyers pointed to several types of trusts that taxpayers can use to take advantage of the current exemption amount.
One of the most common ways to reduce the value of an estate is to create a spousal lifetime access trust, estate attorneys said. This strategy allows the donor spouse to continue receiving benefits from her assets because her partner will now be in control of the assets. However, if the couple divorces or the beneficiary dies, the donor loses access.
Lawyers in a recent American Law Association webcast noted that these types of trusts are a planning opportunity for lawyers this year and next.
Although there are “strings attached” that people creating trusts can attach, there's a risk that the IRS will consider it an improper gift and still consider it part of the estate, Procki said.
Another popular option is a dynasty trust that benefits future generations of the donor. Additionally, taxpayers may keep business assets that continue to increase in value and pay income taxes while holding them in a trust, causing the value of those assets to decline further.
Dynasty trusts are intended to be implemented over a long period of time and should be designed with some flexibility, Hinson said.
A common strategy is to add a trust protector who can make changes to the contract, Hinson said. Donors can choose how guardians can change the trust, including adding or removing beneficiaries or making tweaks based on changes in the law. Trust protectors have grown in popularity in recent years, she said.
Be careful with gifts
But estate planners say those who need their money back and whose inherited assets are worth the same amount or less than the increased exemption amount will be looking to take advantage of the increased exemption amount by 2026. He says that may be going too far.
Partner at Lowenstein Sandler and previously at the Treasury Department. “Like the house they live in.”
Megan Muncy Federman, an associate at Lowenstein Sandler, said a similar push to increase the exemption amount occurred in 2012, but the exemption amount was not reduced. Taxpayers were frustrated that they could no longer access the money they had gifted.
“When you plan this, you have to be willing to part with the money that you're actually giving away,” Federman said.
