Maximize Your Estate and Gift Exclusions Before 2025
In 2022 the Internal Revenue Service maintains a $12.06 million gift and estate exemption as part of the Tax Cuts and Jobs Act of 2017, meaning that you can leave up to $12.06 million to a spouse automatically after death without your spouse incurring a federal estate tax. You could also gift funds up to $12.06 million, at $16,000 per year per individual. A married couple, then, could essentially shield $24.12 million from a federal estate or gift tax collectively.
However, this is not the case after 2025.
Upcoming Estate Planning Changes
For the 2026 tax year, the estate or gift tax exemption is reduced to $6.4 million. At that time, wealth transfer above that threshold could be taxed at the federal level while your beneficiaries could be levied an inheritance tax as well. The effective federal estate and gift tax rate ranges from 18% to 40% depending on the amount of the estate transfer above the untaxable threshold.
In addition, several states also levy estate and inheritance taxes at certain thresholds of wealth transfer at the time of death.
What does this mean for you?
First of all, the federal estate and gift tax and certain state taxes apply to individuals and families with large estates. However, you should check with your CPA if your estate is large enough to be concerned about these taxes at the federal or state level… particularly if the fair market value of your estate includes land holdings, a business or investment stake. In those cases, the value of your estate could more easily surpass that $6.4 million threshold.
The same holds true if you expect to inherit millions from a family member in the future. And, of course, there are those rare individuals who win the lottery.
In these instances, with the help of your attorney and certified public accountant, you can put vehicles in place that will help you reduce your taxable estate and have more control of where your money goes after death.
This includes keeping the funds within the family, starting a foundation or creating any other wealth transfer plan you may have in mind.
Tax Planning Before 2025
It can take several years to put your plans in motion, so start the planning process to reduce the size of your estate now and shelter your wealth from estate or gift tax in the coming years.
First and foremost, you can gift up to $16,000 per year to any and as many individuals as you like without you or the recipient having to report these gifts to the IRS. This strategy reduces how much your estate is worth at fair market value after you die. Your recipients, in turn, could keep that money available for you if needed in the future or they could use it now to support their life and business goals. With gifting, you also don’t have to worry about your beneficiaries being taxed on their inheritance after you die.
The bottom line is to rethink your estate planning for the future if you have a large estate. Don’t put all of your eggs in one basket, as they say. Here are a few other examples you can use to arrange your funds carefully and with purpose, so you can make the most of your estate.
Set aside money through trusts – There are a variety of trust vehicles available to help you allocate and manage money purposefully, thus reducing the value of your estate after death.
For example, when you have children and/or grandchildren, you might not want all of your assets to fall to your spouse exclusively or to make family members wait for their inheritance. Set up different trusts that specify who your assets should go to and when. This can ensure that everyone you care about has their equal share or that the correct administrator has control of your interests when you pass.
Start 529 plans – Set up 529 college funds for your grandchildren to give them a good head start on their careers and their futures.
Set up a foundation – Start a foundation for a cause you care about. This will especially ring true if you yourself have lost a loved one to cancer or another rare disease that you may be able to help find a cure for with your valued endowment.
Pursue philanthropy – Donate an estimable sum to a cause that is already well established to secure your investment.
Update wills and trusts – Bonus: Update your will. Make sure you’ve updated your will to reflect these changes and updates to your estate plan.
Work with your attorney and your certified public accountant at Anglin to set these vehicles in motion. We are always here to help walk you through your tax planning, estate planning or wealth management needs.
Additional insight: Everyone has an estate, whether it is a coin collection or a tract of land. Big or small – and regardless of law changes – estate planning is essentially life planning. In the end, knowing where you’re transferring your assets is essential to planning the trajectory of your life.
You may need to know the value of your assets or business in order to do the aforementioned estate planning. Ask us about our business valuation services to get started.