As we approach the end of 2024, it’s crucial to be aware of significant changes on the horizon that could impact your estate planning strategy. One of the most notable changes is the estate tax exemption, commonly referred to as the “estate sunset” set for January 1, 2026. Understanding these changes and planning accordingly can help protect your assets and ensure your family’s financial security.
What is the Estate Sunset?
The estate tax exemption is the amount of money that can be passed to heirs without incurring federal estate taxes. Under the Tax Cuts and Jobs Act (TCJA) of 2017, the exemption amount was temporarily doubled. For 2024, this means an individual can pass up to $13.61 million to their heirs tax-free, and a married couple can pass up to $27.22 million.
However, this provision is set to expire, or “sunset,” at the end of 2025. Unless Congress takes action, the estate tax exemption will revert to pre-TCJA levels on January 1, 2026, estimated to be around $6 million for individuals and $12 million for married couples, adjusted for inflation.
How Will This Affect Your Estate Planning?
The reduction in the estate tax exemption means that more estates will be subject to federal estate taxes. Here’s how this change could impact you:
- Increased Estate Tax Liability: Estates exceeding the lower exemption amounts will face federal estate taxes at rates up to 45%. This could significantly reduce the amount your heirs receive.
- Need for Updated Estate Plans: With the impending reduction, it is essential to review and possibly update your estate plan to ensure it still aligns with your goals and takes advantage of the higher exemption while it’s available.
- Consider Gifting Strategies: One way to mitigate potential estate taxes is through strategic gifting. By making gifts during your lifetime, you can reduce the value of your estate and take advantage of the current high exemption.
- Use of Trusts: Trusts can be an effective tool to manage estate taxes and provide for your heirs. Reviewing your existing trusts and considering new ones might be necessary to optimize your estate planning strategy.
What Should You Do Now?
Given the impending changes, here are some steps to consider:
- Consult with an Estate Planning Attorney: An experienced estate planning attorney can help you navigate these changes and develop a strategy tailored to your unique situation.
- Review Your Current Plan: Ensure that your current estate plan reflects your goals and takes full advantage of the higher exemption before it sunsets.
- Evaluate Gifting Options: Consider making significant gifts before the exemption decreases. This can include direct gifts to heirs or contributions to irrevocable trusts.
- Stay Informed: Tax laws can change, and it’s essential to stay informed about potential legislative actions that could impact your estate plan.
The estate sunset for 2025 presents a critical juncture for estate planning. By understanding the upcoming changes and taking proactive steps now, you can protect your assets and ensure your family’s financial security. Don’t wait until it’s too late—consult with an estate planning professional today to make the most of the current favorable estate tax laws.
If you have any questions or need assistance with your estate planning, we would be happy to assist.
