The Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”) is set to “sunset” (expire) at the end of 2025. The 2017 Tax Act was enacted during the first Trump Administration. Though some who follow tax policy closely believe that the 2017 Tax Act will be extended, or something similar will be enacted this year during the second Trump administration, nothing is certain, especially in Washington. The only certainty is that unless Congress and President Trump can agree on new tax policy, the 2017 Tax Act will “sunset” and some of the taxpayer-friendly provisions Americans have grown accustomed to will be gone, possibly forever. Given the unpredictability in Washington, taxpayers must prepare for the possibility of having less taxpayer-friendly laws in place next year. Proactive planning may be in order.
As a result of the 2017 Tax Act, the exclusion amount against the federal estate and gift tax in 2025 is approximately $13.9M per person. Unless new tax legislation is enacted sometime this year, the exclusion amount will be cut in half to approximately $7M per person next year. So, it is quite possible that when taxpayers wake up next January 1, 2026, they may find that the exclusion amount they had just the day before was cut in half. Of course, the “sunset” is only going to be material for those with estates that are measured in the millions of dollars. However, those who have such estates and are impacted by the tax could face federal estate tax rates as high as 40%.
For those individuals and couples who have estates measured in the millions of dollars, it would be wise to consider taking advantage of the elevated exclusion amounts while they can. The 2017 Tax Act is written in a manner to allow taxpayers to use the exclusion amount during their lifetime, at the time of their death, or a combination of the two. In other words, if an individual were to use his/her entire fourteen-million-dollar exclusion prior to the “sunset”, the IRS would not recapture the amount of the gift in excess of the exclusion amounts available in 2026 and beyond because such used exclusion would be considered final in the eyes of the IRS. So, the good news is that taxpayers do not need to be deceased this year in order to take advantage of these elevated exclusion amounts. Instead, taxpayers can take advantage of the elevated exclusion amount before it potentially expires by making a gift or planning in some other manner this year while they are still living.
Whether taxpayers preplan for the “sunset” or take the chance that the “sunset” does not occur, the initial step should remain the same: consult an estate planning attorney to determine how to best use the applicable exclusion amount. If an estate is likely to owe estate tax following more basic planning, taxpayers should consider additional options to account for the tax. Some of the more common options include but are not limited to: (a) donating a specified amount of assets to a charity to obtain a charitable deduction, therefore reducing the taxable estate, (b) creating an irrevocable trust for the benefit of some individual other than the taxpayer, and/or (c) if the estate is illiquid due to the presence of substantial real estate or business interests, implementing an irrevocable life insurance trust (commonly referred to as an ILIT) to create a pool of cash to help pay for the estate tax. Failing to preplan, whether through the previously described options or some other technique, could cause the taxpayer’s estate to pay any final taxes (as much as 40%) and therefore significantly reduce any amount the taxpayer would otherwise pass to children, grandchildren, or others.
Failing to preplan this year and take advantage of a larger exclusion prior to the possible “sunset” could result in more in-depth planning becoming necessary in the future. Notwithstanding that fact, many practitioners believe the “sunset” will be extended. Some believe that though the exclusion may not be extended at its current threshold, it will not be halved. Others worry Congress will fail to pass any law that would extend the “sunset” at its current or a slightly reduced threshold. Nonetheless, until Washington extends the 2017 Tax Act’s elevated exclusion, practitioners and clients alike have two options: (1) begin planning for the “sunset” or (2) bet on the odds that the “sunset” never materializes. Just know, if you bet on the odds that the “sunset” will not occur and it in fact does, that bet could cost your estate up to forty percent of your assets in excess of the exclusion amount.
If you or your family need assistance regarding your estate plan or have more in-depth questions regarding estate tax planning, Stoll Keenon Ogden’s team of attorneys is ready to help.[1]
[1] This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, accounting, or legal advice. Please contact SKO or your other tax and/or legal advisor prior to entering into any transaction regarding your estate plan.
