Current estate tax exemptions are set to expire at the end of 2025, which means we could see a 50% reduction in available exemption per person.
It has been 87 years since the last time the available exemption decreased.
Currently, individuals may transfer about $12 million in assets (combined for lifetime gifts and transfers at death) without being charged federal gift or estate taxes. Unless new legislature is passed, the estate tax exemption will return to the previous $5 million per person, indexed for inflation (so around $6 million per person) after December 31, 2025. Assets transferred above the exemption amount would be taxed on a sliding scale that quickly reaches 40%.
Does this apply to me?
Before assuming that the number is too large to apply to you, remember that your taxable estate includes: cash, investments, personal property, vehicles, real estate properties, retirement accounts, bank accounts, business assets, death benefits received from life insurance and annuities, and jointly held assets. Also, don’t forget possible future inheritances!
Even if your assets do not exceed the exemption amount today, with a well-diversified investment and retirement portfolio, appreciation on assets might put your accounts into a higher threshold than you anticipate.
How do you make sure Uncle Sam isn’t an 18-40% beneficiary?
You can still take advantage of estate planning strategies prior to tax laws sunsetting in 2025. These strategies often involve transferring assets out of your taxable estate, allowing you to receive the full benefit of the current exemption amounts before they expire.
A full team of advisors, including an estate attorney, tax advisor, and wealth advisor, is imperative to ensure any strategies you choose are carried out correctly. Working with an estate attorney to have the appropriate documents drafted is an important step but not the end of planning. Once you have created a plan, your financial assets must be titled to match your estate documents, and your beneficiary designations need to be in line with your intentions.
Where to begin
You may already know that you’ll face this issue. If not, a financial plan can help uncover whether this is a possibility by modeling growth expectations and the future state of your balances. From there, we can work together on a plan to put together the right team for you.