With the upcoming election, many changes could be on the horizon, particularly in tax policy, and this makes now the perfect time to review your estate plan. Many are already focusing on potential changes to estate taxes, as political parties have starkly different views on how the tax system should treat wealth transfers.
For years, the estate tax has been a point of debate. Currently, only a very small percentage of estates are subject to the tax, thanks in part to the higher exemption levels established under the tax cuts of 2017. However, this exemption could change depending on the outcome of the election. As of 2024, the federal estate tax exemption is historically high, sitting at $13.61 million per individual and $27.2 million for married couples. This means that estates below this threshold are not subject to federal estate taxes. These exemptions were significantly increased under the Tax Cuts and Jobs Act which temporarily raised the exemption from around $5.5 million per individual. However, this favorable tax environment may not last forever and is set to sunset at the end of 2025 if no legislative action is taken. Many tax experts estimate that if the current law sunsets at the end of 2025, the indexed exemption starting on January 1, 2026 will be around $7 million per person.
If the election leads to lower exemptions, it could dramatically impact estate planning strategies for those with significant wealth. While the IRS has stated it won’t claw back taxes on gifts made above the new threshold if exemptions fall, this creates a level of uncertainty for anyone looking to pass on substantial assets to future generations.
Planning ahead is essential. Wealthy families and individuals should be considering trusts, gifts, and other estate planning strategies now, while the current tax laws are still in place. Even if you aren’t affected by the estate tax today, changes could bring more estates under its umbrella.
Mitigating Potential Changes with Advanced Estate Planning
The good news is that there are several advanced estate planning strategies that individuals can use to mitigate the potential impact of lower estate tax exemptions. These strategies are particularly important now, while the current exemptions are still in place.
- Lifetime Gifting: One of the most effective ways to reduce the size of an estate is through lifetime gifting. Individuals can gift up to $18,000 per recipient annually without triggering any gift tax. Larger gifts can be applied against the lifetime exemption, but making substantial gifts now could lock in the current high exemption levels, shielding those assets from future estate tax changes.
- Irrevocable Trusts: Irrevocable trusts allow individuals to remove assets from their taxable estate. These trusts can help families transfer wealth to future generations while minimizing or even avoiding estate taxes. By funding these trusts before the exemption decreases, families can transfer substantial assets tax-efficiently and allow the assets to grow in value outside the estate tax system.
- Charitable Remainder Trusts (CRTs): For those interested in philanthropy, charitable remainder trusts are an excellent way to reduce estate taxes while benefiting a charitable cause. These trusts allow individuals to receive income from the trust during their lifetime, with the remainder going to charity upon their death. This strategy can significantly reduce the taxable estate (and even capital gains taxes when a highly appreciated asset contributed to the trust is sold inside the trust).
- Spousal Lifetime Access Trusts (SLATs): SLATs allow one spouse to create a trust for the benefit of the other spouse, removing their separate property assets from their estate while still allowing access to income or assets through their spouse. This can be a useful tool for families wanting to benefit from the current high exemption while retaining some flexibility in accessing wealth.
- Family Limited Partnerships (FLPs): FLPs can help individuals transfer assets to family members while retaining some control over those assets. When combined with gifting strategies, FLPs can be used to transfer family businesses, real estate, or investments with valuation discounts to irrevocable trusts such as IDGTs and SLATs, further reducing the size of their taxable estates.
Election season always brings uncertainty, but with taxes and wealth transfers squarely in the spotlight, now is a crucial time to ensure your estate plan is up to date. An estate planning attorney skilled in advanced planning can help you review your plan and make adjustments to align with any potential changes in tax law. Don’t wait until after the election to begin reviewing your estate plan—start now to take advantage of current laws and ensure your future plans are secure. The attorneys that do this niche work will start to become overrun in the near future.
If you, a friend, or family member need help establishing or updating an estate, please reach out to our Intake Department at 760-448-2220 or at https://www.geigerlawoffice.com/contact.cfm. We have offices in San Diego County (Carlsbad) and Orange County (Laguna Niguel), but we assist can families throughout California as well.
