TCJA Estate Tax: Understanding the Changes and Opportunities

The Tax Cuts and Jobs Act (TCJA) made significant changes to the estate tax, which can be confusing for many people. The estate tax exemption doubled to $11.18 million for individuals and $22.36 million for married couples.

The TCJA also introduced a new concept called "stepped-up basis", which allows heirs to value inherited assets at their current market value, rather than their original purchase price.

This change can result in significant tax savings for heirs. For example, if an heir inherits a piece of property worth $1 million, they can sell it immediately and pay capital gains tax on the difference between the original purchase price and the current market value.

The TCJA also repealed the "death tax" on family-owned businesses and farms, which can help preserve family legacies and ensure the continuation of these businesses.

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The estate tax exemption is a crucial aspect of tax planning under the TCJA. The exemption was doubled for tax years 2018-2025, but it's set to sunset at the end of 2025.

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For tax year 2026, the exemption is expected to return to approximately $7 million per individual, which is half of its then-indexed-for-inflation amount. This change could have a significant impact on high-net-worth individuals and families.

The TCJA reduced the tax burden on estates, with fewer estates subject to the 40% transfer tax. The exemption amount was doubled from $5 million to $10 million for individuals, and from $10 million to $20 million for married couples.

The exemption amount is indexed for inflation annually, resulting in a current exemption of $13.61 million per individual in 2024. However, this increased exemption is set to sunset at the end of 2025.

To take advantage of the elevated exemption, consider making outright lifetime gifts or using irrevocable gift trusts for descendants. These strategies can help reduce estate tax liability and provide creditor protection for the assets in the trust.

Some key planning opportunities to consider before the sunset of the increased exemption include:

It's essential to understand the impact of the sunset on your estate plan and consider consulting with a tax professional or financial advisor to determine the best course of action for your specific situation.

Estate tax savings and gifting are two crucial aspects of TCJA estate tax planning. The elevated exemption amount provides a rare opportunity to transfer assets to the next generation while minimizing tax liabilities.

The current exemption level is significantly higher than expected, making outright lifetime gifts a straightforward way to pass assets to the next generation. This can result in substantial tax savings, especially considering the exemption is set to revert to its previous level in 2026.

For example, if an unmarried individual's estate was valued at $15 million, gifting $13.99 million using the current exemption would save $2.8 million in estate tax liability compared to doing nothing.

To maximize estate tax savings, consider using irrevocable gift trusts for descendants. These trusts can utilize estate and generation-skipping tax exemptions, potentially at a discounted valuation if the gifts comprise closely held business interests.

Assets gifted to these trusts can be maintained outside of the estate, gift, and generation-skipping transfer tax indefinitely, providing creditor protection and control over the ultimate disposition of those assets.

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Key estate planning options include:

Dynasty trusts allow for the tax-free transfer of assets to descendants and beneficiaries, while SLATs provide indirect access to trust assets for the duration of the marriage.

It's essential to evaluate the impact of state and international transfer taxes on your estate plan, as exemption levels are generally lower than the federal level.

An Irrevocable Life Insurance Trust (ILIT) can be a valuable tool to increase liquidity available to the estate to pay estate taxes, especially in the closely held business context.

The typical case involves the trust holding insurance on the life of the grantor, which is not included in the grantor's taxable estate at death.

At the grantor's death, the death benefit proceeds are then available to the estate to pay for any estate tax liability or other outstanding debt, mitigating the risk of having to sell estate assets.

Having access to these funds can ensure the continuity of the business within the family, as a high estate tax bill may otherwise force the sale of part or all of the interest to raise the funds needed to pay the tax liability.

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As the Tax Cuts and Jobs Act (TCJA) estate tax exemption is set to expire, it's essential to consider planning opportunities before sunset. There are several planning opportunities to consider, and any member of Holland & Knight's Private Wealth Services Group can help explore the optimal strategy for specific estate structures.

The current exemption limits are set to expire on December 31, 2025, unless Congress makes changes, so it's crucial to act before the end of 2025 deadline. Proper financial and estate planning today can help save you unnecessary taxes in the future.

If your estate crosses an international border, it's essential to consider both US and non-US estate or inheritance tax, as well as the tax basis of assets that will pass to the next generation.

The elevated estate tax exemption means that certain lifetime gifting strategies implemented before 2025 may be more effective in reducing the value of your estate and overall estate tax owed at death.

To make informed decisions, it's crucial to understand your entire financial picture by modeling your balance sheet and expected growth to help predict when and if an estate will be taxable.

Some key questions to consider include: how much liquidity will you need during your lifetime, what are your assets worth now or in the future, and which state or country do you and your beneficiaries plan to call home.

A combination of strategies can be implemented in an effective estate plan, including trust structures, generational planning, charitable planning, boosting tax-advantaged accounts, and annual and lifetime gifting.

Here are some common types of US trusts used for gifting:

Assets in a trust, such as a dynasty trust, will remain free of estate, gift, and generation-skipping transfer tax and continue to grow estate tax-free.

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