The Tax Cuts and Jobs Act (TCJA) of 2017 marked a significant shift in estate and gift tax exemptions. Under the TCJA, the individual exemption surged from $5.6 million to $11.18 million, while the couples’ exemption soared from $11.18 million to $22.36 million. Post-2018, these amounts were annually adjusted for inflation. However, unless Congress intervenes, these numbers will look very different starting in 2026.
Understanding Lifetime Exemptions and the Sunset
Lifetime exemptions play a vital role in estate planning, determining the amount of wealth an individual can pass on to heirs without incurring federal estate taxes. Over the years, these exemptions have seen fluctuations influenced by legislative changes and economic considerations.
Established as part of the TCJA in 2017, the current framework provides a generous lifetime exemption for individuals and couples. For the 2023 tax year, the exemption is $12.92 million for individuals and $25.84 million for couples. However, this is a temporary boom, as the TCJA included a sunset provision that is set to revert the exemptions to pre-2018 levels after December 31, 2025.
As we approach the sunset date, individuals with substantial estates face a potentially different estate tax landscape. If Congress does not make any legislative changes, the lifetime exemptions will decrease significantly, reverting to the lower levels seen before the TCJA took effect. For those with estates that would exceed the reduced exemption amounts, the change could result in higher estate tax taxes and liabilities. Because of this, comprehensive estate planning becomes even more crucial to limit potential tax burdens and preserve wealth for future generations.
Navigating the Changes
With the uncertainties surrounding any potential Congressional changes, it is essential for individuals to stay informed and prepare for the upcoming changes. Some strategies to consider to help navigate the impending changes are:
1. Asset identification
When it comes to assets, there are some accessible assets that you may identify. These assets would be easy to move out of your estate, but the most powerful assets are those with low basis and high appreciation. These may look like business interests or family-limited partnerships.
2. Anticipate valuation needs
With these types of assets moving out of the estate, it is essential to consider the valuation needs. By understanding the impact of valuation, navigating complex assets, facilitating smoother planning, and mitigating last-minute challenges, individuals can position themselves for a more secure financial future.
3. Engage in early planning
Early planning with a tax professional can help maximize estate tax savings. The changes brought about by the 2017 Tax Cuts and Jobs Act have granted chances to utilize higher exemptions, but these benefits might be short-lived without proper planning. As we approach the sunset on 12/21/2025, when the exemptions are expected to decrease, early planning and developing strategies with a tax professional becomes essential.
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