Highlights
- As part of the Tax Cuts and Jobs Act (TCJA), the estate and gift tax exemption was doubled for tax years 2018-2025.
- This increased exemption is set to sunset at the end of 2025, at which time – barring legislative action prior to the end of the year – the exemption will be reduced to one-half of its then-indexed-for-inflation amount.
- This Holland & Knight alert features some of the many planning opportunities to consider before the sunset of the increased estate and gift tax exemption.
As part of the Tax Cuts and Jobs Act (TCJA), the estate and gift tax exemption was doubled for tax years 2018-2025. In 2018, the exemption doubled from $5.49 million in 2017 to $11.18 million in 2018, and that amount has been indexed for inflation annually since then, resulting in a current exemption of $13.61 million per individual in 2024.
This increased exemption is set to sunset at the end of 2025, at which time – barring legislative action prior to the end of the year – the exemption will be reduced to one-half of its then-indexed-for-inflation amount. Forecasts currently predict the exemption to be approximately $7 million as of Jan. 1, 2026.
Planning Opportunities Before Sunset
There are many planning opportunities to consider before the sunset of the increased estate and gift tax exemption, several of which are described in this alert. Any member of Holland & Knight's Private Wealth Services Group is available to explore the optimal strategy for specific estate structures.
Outright Lifetime Gifts
Gifting assets or cash directly to the next generation while the exemption is high is a straightforward way to pass assets to the next generation to utilize lifetime exemptions. With current exemption levels being much higher than the expected exemption level after the sunset, a direct transfer or wealth to the next generation can result in substantial tax savings.
Spousal Lifetime Access Trust (SLAT)
Under the typical SLAT structure, the grantor spouse names his or her spouse as the primary beneficiary of the trust, intentionally doing so in a manner that is not eligible for the marital deduction. The grantor spouse uses his or her estate and gift tax exemption, and the beneficiary spouse has access to the trust assets, providing estate tax savings by removing the assets from the grantor spouse's estate while preserving access to the assets for the combined marital unit through the beneficiary spouse. Assuming distributions to the beneficiary spouse are limited to distributions based on an ascertainable standard, the beneficiary spouse may even be able to serve as the trustee, keeping control of the assets fully within the marital unit. A trusted individual trustee may also be appointed to have discretion over more "extraordinary" distributions beyond health, education, maintenance and support for the beneficiary spouse. The SLAT may also include descendants as permissible beneficiaries so distributions for their benefit avoid any gift tax implications for the beneficiary spouse.
Irrevocable Gift Trusts for Descendants
If there are concerns with making an outright distribution of assets to the next generation, another planning opportunity that is especially valuable while the exemption is elevated is an irrevocable gift trust for the benefit of children and future lineal descendants. Assets gifted to these trusts use estate and generation-skipping tax exemptions, possibly at a discounted valuation if the gifts comprise closely held business interests, allowing all future appreciation of the assets to avoid estate tax at the time of the grantor's death, since the assets are out of your estate. If properly structured, the assets in trust may be maintained outside of the estate, gift and generation-skipping transfer tax indefinitely. Further, a properly structured irrevocable gift trust may include the beneficiary as a trustee and still provide creditor protection for the assets in the trust, including from a future divorce of the beneficiary.
Irrevocable Life Insurance Trust (ILIT)
In light of the sunset, an ILIT can be a valuable tool to increase liquidity available to the estate to pay estate taxes. Given the lower exemption amount post-sunset, more assets of an estate will be subject to estate tax at death. Having increased liquidity available on a tax-efficient basis can mitigate the risk of having to sell estate assets that the deceased person would otherwise want to pass on to his or her heirs.
In the typical case, the trust holds insurance on the life of the grantor. Under a properly structured ILIT, at the grantor's death, the death benefit proceeds are not included in the grantor's taxable estate, and those funds are then available to the estate to pay for any estate tax liability or other outstanding debt of the estate for which the estate would otherwise lack the liquidity to pay.
This increased liquidity is especially important in the closely held business context and, more specifically, the family-owned business context. Often times, a majority of the value of the estate of an owner of a family-owned business comes from the value of the interest. If the estate is otherwise illiquid, a high estate tax bill may force the sale of part or all of the interest to raise the funds needed to pay the tax liability. Having access to the funds from an ILIT can ensure the continuity of the business within the family.
Conclusion
These are examples of strategies to take advantage of the higher lifetime exemption before it sunsets at the end of 2025, but it is not an exhaustive list of options.
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.