The classic children's tale of Cinderella has the magic spell that transformed Cinderella expiring at the stroke of midnight after the ball. Her magnificent coach turned back into a pumpkin, inspiring a commonly used phrase. But as we all know, there was a happy ending despite losing the magic.
Unfortunately, a potential estate tax Cinderella story may not have a happy ending for those high net-worth clients who could lose millions of dollars in tax benefits when the clock strikes twelve on December 31, 2025.
Unless Congress and the new administration act before that deadline, the current law set out in the 2017 Tax Cuts and Jobs Act (TCJA) will expire due to Congressional budget rules. This is often referred to as the "sunsetting of the TCJA." While many tax provisions will be impacted by this sunsetting of the law, the focus of this blog is on the estate tax exemption amount.
In 2024 the Federal estate tax exemption amount is $13.61 million per individual (a combined $27.22 million for a married couple). This is an inflation-adjusted amount from the original $10 million individual exemption in 2018.
But on January 1, 2026, if nothing changes, the sunsetting of the TCJA will cause this exemption amount to drop to one-half of that original $10 million amount, or $5 million adjusted for inflation, projected to be between $6.5 and $7 million per person or $13-14 million per couple.
So what does this mean? If you are an individual with $13 million in assets in your name today, if you were to die in 2024 your estate would not face a tax since your net worth was below $13.61 million (making certain assumptions). But with that same net worth on January 1, 2026, your estate would be taxed on approximately half of the assets. With the current estate tax rate being 40%, the impact of this exemption reduction is a tax bill of about $2.8 million for, as some might say, dying one day too late!
While this TCJA sunset may not happen if there is corrective legislation, we likely won't know that until well into 2025. It may very well be too late to do the right kind of estate tax and financial planning that is needed if and when Congress acts. We can hope this will happen and we don't have to do this type of planning, but as the old saying goes, "hope is not a strategy."
So, given all that, what do we recommend to our clients on the sunset provisions?
Your overall estate plan is the foundation of your overall planning and it is largely not directly impacted by the TCJA sunsetting.
So we recommend that if you don't have a good plan in place, you get one, and if you have an old plan in place, it is a good idea to have an estate planning professional review it with you to see if there are changes that should be made.
For clients who may be facing an estate tax issue down the road, to the extent that we can take advantage of the current estate tax exemption amounts we should be looking at planning options that make sense for your situation. This should be a collaborative effort with a client's other trusted professional advisors for taxes, financial planning, insurance, business matters, and others.
While not every client can afford to take full advantage of the pre-sunset period to reduce or eliminate future estate taxes, there may be some opportunities for many clients that they may just not be aware of yet.
We try to build as much flexibility and adaptability as possible into our plans to help our clients develop tax-efficient strategies that don't require them to unnecessarily fence off their assets during their lifetimes just to save tax money down the road.
But don't forget, the Federal estate tax rate is currently 40% for most taxable estates so tax savings is an important consideration!
Finally, not having a plan is a plan in itself—just not a good one!
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.