Last Updated on August 15, 2024 by Chris Franchina
Last Updated: August 15th, 2024
Estate Planning Potential Tax Changes in 2025 and Beyond
There’s an important change on the horizon that you need to be aware of. Back in 2017, the Tax Cuts and Jobs Act brought a significant opportunity for wealthier individuals and families. It more than doubled the lifetime estate tax exemption, providing a chance to pass on more assets tax-free. However, this opportunity is set to expire at the end of 2025.
Retirement planning always involves looking ahead, but the future of estate taxes is particularly uncertain. The Tax Cuts and Jobs Act of 2017 offered increased benefits with its generous gift and estate tax exemptions. However, these exemptions are set to expire on January 1, 2026, unless Congress intervenes.
This uncertainty presents both challenges and opportunities. By proactively planning now, you can take advantage of current benefits and prepare for potential tax changes in 2025 and beyond.
Key Points to Remember:
- Expiration Date: The current higher gift and estate tax exemption amounts expire on January 1, 2026.
- Potential Impact: If the law reverts, the exemption amounts will fall back to what they were in 2017: around $7 million for individuals and $14 million for married couples (adjusted for inflation).
- Time to Act: While 2026 may seem distant, proactive planning now gives you greater control over your future wealth distribution, regardless of potential tax changes in 2025 and beyond.
What to Do Now:
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Assess Your Finances: Determine how much you can afford to give away during your lifetime without compromising your lifestyle.
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Work with Professionals: Consult with your estate planning professional to devise a plan that suits your unique situation.
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Consider Trusts and Life Insurance: Explore different types of trusts and life insurance strategies to safeguard your wealth.
Estate Planning Strategies:
1. Leveraging Gift Tax Exemptions:
Maximizing Lifetime Exemption:
- Think of it as a big bank account: The current individual lifetime exemption is $12.92 million, and $24.8 million for married couples. This is the total amount you can transfer tax-free during your lifetime.
- Use it or lose it: Once you exceed this limit, your estate may be subject to hefty taxes. By gifting assets now, you “lock in” the current, higher exemption before it potentially decreases in the future.
- Smart gifting: Strategically gifting valuable assets like stocks or real estate to loved ones now reduces the size of your taxable estate later.
Utilizing Annual Exclusion:
- Think of it as a small, regular allowance: Each year, you can gift up to $18,000 per recipient (as of 2024) without it impacting your lifetime exemption. This is like a free pass for smaller tax-free gifts.
- Spread the wealth: You can give to multiple recipients, effectively making it a larger tax-free transfer each year. For example, a couple can gift $36,000 per year to a grandchild without impacting their lifetime exemption.
- Cumulative over time: These smaller gifts, over time, can significantly reduce your estate size and minimize future tax burdens for your beneficiaries.
2. Strategic Trust Options:
- Spousal Lifetime Access Trust (SLAT): A SLAT is an irrevocable trust that allows one spouse to fund it for the benefit of the other. It provides flexibility for the beneficiary spouse but comes with the downside of the donor spouse losing direct access to the assets. You can transfer assets to a trust for your spouse’s benefit, shielded from future estate taxes for both spouses.
Think of it as a safe deposit box for your spouse. You (the donor spouse) put assets in the trust for your spouse’s (the beneficiary spouse) benefit. Here’s what it does:
- Tax benefits: Assets in the SLAT grow and are typically excluded from both your estate and your spouse’s estate, potentially saving a significant amount in taxes.
- Flexibility for beneficiary spouse: Your spouse enjoys income and, depending on the trust terms, access to the principal.
- Downside for donor spouse: Once you put assets in the SLAT, you can’t take them back. Think long before making this move.
- Credit Shelter Trust (CST): This trust shelters a portion of assets from estate taxes when one spouse dies. There might be additional income taxes for beneficiaries, so it’s essential to weigh the pros and cons. It will protect a portion of your estate from tax when the first spouse dies, allowing it to grow and pass tax-free to the surviving spouse.
Think of it as a life raft for your estate. When the first spouse dies, it protects a portion of your estate from taxes, allowing it to grow and eventually pass tax-free to the surviving spouse. Here’s how it works:
- Tax shield: A portion of your estate (up to the current exemption) goes directly to the trust, escaping immediate taxation.
- Growth potential: Assets in the trust can grow tax-deferred, eventually benefiting the surviving spouse.
- Potential income tax for beneficiaries: Depending on the trust terms, income generated from the trust might be taxable for the surviving spouse.
3. Permanent Life Insurance:
How it works:
- Two components: Permanent life insurance has two components: death benefit paid to your beneficiaries and a cash value that grows over time.
- Premium payments: You pay regular premiums, a portion of which goes towards the death benefit and the rest builds the cash value.
- Cash value growth: The cash value accumulates tax-deferred, meaning you don’t pay taxes on its growth unless you withdraw it (Loans from the cash value may be tax-free).
- Accessing cash value: You can access the cash value through loans or withdrawals (restrictions may apply, consult a licensed insurance professional).
Covering estate taxes:
- Liquidity source: The cash value can be used to pay estate taxes after your death, providing your beneficiaries with the funds needed to avoid selling assets or facing tax penalties.
- Tax benefits: In some cases, using the cash value for estate taxes can be more tax-efficient than simply leaving the death benefit to your beneficiaries.
- Planning considerations: The effectiveness of this strategy depends on your individual circumstances, policy type, and estate size.
Why Care About Estate Planning?
You’ve spent decades building a life you love, with a cozy home, happy family, and enough savings to enjoy your retirement. But have you ever stopped to think about what happens after? It might not be the most cheerful topic, but planning for the future is critical to protecting your loved ones and leaving a lasting legacy. That’s where estate planning comes in and is more important than ever.
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Think of it like building a sturdy bridge into the future. You put the pieces in place now so your family can cross smoothly when the time comes. It avoids confusion, keeps your loved ones secure, and even saves them a hefty chunk of change thanks to intelligent tax planning. Trust us, nobody wants to deal with legal tangles and family dramas at a time like that.
Planning Made Simple:
Here’s the good news: estate planning doesn’t have to be rocket science. We’ll focus on practical steps like:
- Gifting Wisely: Got grandkids you adore? You can give them each up to $18,000 a year without affecting your lifetime tax exemption. That’s a nice head start for their college funds or future dreams.
- Trusty Trusts: Think of these as safe deposit boxes for your assets. We’ll explain how trusts like Spousal Lifetime Access Trusts and Credit Shelter Trusts can shield your estate from taxes and ensure your spouse is cared for.
- Charitable Choices: Giving back feels good and can reduce your taxable estate. We’ll show you how donating to causes you care about can benefit you and future generations.
- State Savvy: Estate laws vary across the country, so we’ll point you towards resources specific to your state, ensuring your plan fits like a glove.
- Tech Tools to the Rescue: Forget dusty folders and scribbled notes. We’ll guide you towards user-friendly online platforms to easily store and update your estate planning documents.
Taking Action:
Ready to build that bridge to a secure future? Here’s what you can do right now:
- Please schedule a consultation with our trusted financial advisor. They can tailor a plan that fits your unique needs and family situation.
- Don’t be afraid to talk to your family. Open communication is key to preventing misunderstandings and ensuring everyone knows your wishes.
Remember: Consulting with a financial advisor or estate planning attorney for personalized guidance tailored to your specific circumstances is always recommended.
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The information provided is for general informational purposes only and should not be considered professional tax or financial advice.
