The Tax Cuts and Jobs Act, passed in late 2017, increased the estate tax exemption from $5 million to $10 million for tax years 2018 through 2025, with both amounts adjusted for inflation. For 2019, the inflation adjusted amount is $11.4 million. In 2026, the exemption is scheduled to drop back to $5 million, adjusted for inflation, and this could happen even sooner depending on what happens in the 2020 election. There were concerns that anyone who made gifts prior to 2026 might lose the benefit of the higher exemption in place when the gift was made. The IRS recently issued regulations that confirm this won’t be the case and anyone who makes gifts during this time period will be able to utilize the higher exemption if they die after 2025.
This temporary increase in the estate tax exemption creates a “use it or lose it” decision for high net worth individuals. We have been working with a number of clients who are looking at ways to do additional gifting during this window of time to reduce the amount of estate tax that is ultimately paid by their families. For clients whose estates would exceed the current exemption amounts of $11.4 million for singles and $22.8 million for a married couple, this type of planning could result in significant estate tax savings. You should also consider your options if your total estate could exceed the reduced estate tax exemption level of $5 million for singles or $10 million for married couples in 2026 (adjusted for inflation). There are a variety of methods to take advantage of this opportunity, including using trusts, family limited partnerships and other approaches.
Before you think about this type of planning, it’s important to step back and frame your long-term goals for your money. You have to make sure your assets are sufficient to meet these goals, then you can start to think about what you want to happen to your assets after you pass. These questions are a core issue we help clients with across the wealth spectrum through our financial planning process.
Naturally this will lead you to consider another common question we see, how much is enough for your heirs? For many clients, finding the balance between what passes to their heirs, how it should be distributed to the heirs, what goes to charities, and how much goes to the government are the key questions they want to think through. These are complex questions that have no right or wrong answer. We often find it is helpful to do a flowchart of your current estate plan and current asset values so that you can see how things will pass.
Weaving together your long-term goals with the estate tax, investment strategy, and financial planning is a key element of what we do for our clients. We would be glad to discuss these issues with you!
-Lyle K Benson, Jr., CPA, PFS, CFP
The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.
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