Is Your Estate Plan Ready for Sunsetting Tax Cuts in 2026?

February 9, 2024

Many of these changes are set to expire at the end of 2025, meaning the time to prepare for their impact on estate plans is now, according to the article “These Tax Cuts are Sunsetting in 2026. Are your clients ready?” from Think Advisor.

The most visible change will be the lifetime estate and gift tax exemption changes. Before 2018, the exemption was $5 million per person and $10 million for a married couple. In 2023, those limits were $12.92 and $25.85 million, respectively. In 2024, those limits are $13.61 million for an individual and $27.22 million for a married couple.

The annual gift tax exclusion was also increased because of the TCJA. In 2023, it was $17,000; in 2024, it is $18,000. It’s not yet clear what it will be after 2025.

Unless something changes, on January 1, 2026, the estate tax exemption will revert back to $5 million; adjusted for inflation, it’s expected to be approximately $7 million per person.

There won’t be much of an impact for estates that won’t exceed the expected 2026 levels. However, the increases in farmland and home values may bring some unexpected increases to the size of many estates.

For those whose estates exceed the 2026 exemption levels, there are many options to reduce the size of the estate to minimize the impact of the lower exemption levels on their heirs in the future. An experienced estate planning attorney can make a strategic plan to address these changes.

One option is to spend down part of the estate, especially if you are older. Now would be the time to travel or make purchases you might have been putting off.

Making lifetime gifts is another way to reduce the size of your estate, while enjoying watching heirs enjoy their inheritance. Gifts could be to children, grandchildren, or others.

The same generosity could be focused on charity. If you’ve been meaning to make a gift at some point, this could be the year to make a legacy gift.

Another tactic: a Roth conversion. If your retirement accounts consist of IRAs, converting to a Roth can help with tax diversification. Money in a Roth is not subject to Required Minimum Distributions, which reduce taxes during retirement. Under the SECURE 2.0 Act, inherited Roth IRAs are tax-efficient for leaving an IRA to non-spousal beneficiaries.

The TCJA increased the standard deduction level, making it difficult for many taxpayers to itemize deductions. The higher standard deduction will revert back to roughly the pre-TCJA levels, which were $6,350 for single filers and $12,700 for those filing married and joint, both indexed for inflation.

Speak with your estate planning attorney to determine how the sunsetting of this law will impact your estate plan and choose your best options in the short and long term.

Reference: Think Advisor (Nov. 22, 2023) “These Tax Cuts are Sunsetting in 2026. Are your clients ready?”

Taxes that Affect an Estate

January 29, 2024

Identifying the Taxes that Affect an Estate

Estate tax and inheritance tax significantly impact an estate’s value. Estate tax is levied on the estate’s total value at death before distribution to beneficiaries. In contrast, inheritance tax is imposed on the beneficiaries based on the value of assets received. Understanding these taxes is critical for effective estate planning.

What Is Inheritance Tax?

Inheritance tax varies by state and is paid by the recipient of the inheritance. States like Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania have specific exemptions and tax rates based on the beneficiary’s relationship with the deceased and the inheritance size.

Federal Estate Tax Explained

For 2024, the federal estate tax exemption is $13.61 million per individual, with estates exceeding this threshold taxed at up to 40%. Estates valued below this limit are exempt from federal estate taxes. High-net-worth individuals benefit significantly from these exemptions but must consider state-level estate taxes, which can vary.

Impact of Tax Rates on Estate Value

Estate tax rates range from 18% to 40%, meaning that taxes can diminish a substantial portion of an estate’s value. Effective estate planning, including trusts and lifetime gifting strategies, can minimize the estate’s taxable value.

Capital Gains Tax: An Important Consideration for Estates

Capital gains tax applies to profits made from selling inherited property or investments. If inherited assets appreciate and are then sold, the beneficiary may owe capital gains tax on the profits.

Minimizing Estate Taxes: Strategies and Tips

Strategies to minimize estate taxes include using both spouses’ estate tax exemptions, spending down assets, gifting and setting up trusts. These methods can reduce the estate’s taxable value, thus lowering the tax liability.

Estate Tax vs. Inheritance Tax: Understanding the Differences

The Estate pays estate tax based on its total value exceeding federal or state thresholds. Inheritance tax is paid by the beneficiary based on the inherited amount and their degree of kinship or lack thereof to the decedent. The key difference is who bears the tax burden – the estate or the inheritor.

How Estate Planning Can Mitigate Tax Impact

Proper estate planning can significantly mitigate the impact of taxes on an estate. An estate planning attorney can help explore various strategies, ensuring compliance with tax laws and maximizing available deductions and exemptions.

Conclusion: Navigating Taxes in Estate Planning

Navigating the complexities of taxes that affect an estate is essential for ensuring a smooth transfer of wealth. Individuals can effectively manage their estate’s tax burden by understanding and planning for both federal and state estate and inheritance taxes.

For personalized advice and to develop a comprehensive estate plan that navigates these tax considerations, schedule a consultation with our experienced estate planning attorneys today.

What Is the Deceased Spousal Unused Exclusion Portability Deadline?

October 23, 2023

Our tax system is designed to tax the aggregate of property transferred during an individual’s lifetime, commonly referred to as gifts, as well as the property transferred upon death. The total value of taxable gifts and assets transferred at the time of death must surpass a specific threshold before any gift or estate taxes are levied, as explained in the article “Portability of Deceased Spousal Unused Exclusion Extended” from The CPA Journal.

The current federal estate tax exclusion is $12,900,000 for 2023, and within a marriage, each spouse has a unified exclusion amount of $12,900,000. The Unified Exclusion Amount or Unified Transfer Tax Credit for 2023 is $5,113,800.

The portability election allows the estate of a deceased taxpayer whom a spouse survives to apply the decedent’s unused exemption amount to their own transfers during life (gifts) and at the time of their death.

By properly calculating and timely filing the Deceased Spousal Unused Exemption (DSUE), heirs can mitigate their tax liability on the inherited estate. Certain requirements must be met:

The deceased was a spouse.
The deceased died after December 31, 2010.
The deceased was a citizen or resident of the US at the time of their death.
The estate was not required to file an estate tax return based on the gross value of the estate and adjusted taxable gifts.

The portability provisions of the 2010 legislation were set to expire on January 1, 2013, but the American Taxpayer Relief Act of 2012 made the ability to elect portability election permanent. The Revenue Procedure 2022-32 became effective on July 8, 2022, and allowed certain taxpayers an extended amount of time—five years—to make a portability election regarding estate and gift taxes.

When first enacted, the executor of an estate was required to elect portability within nine months of the date of death or on the last day of the period covered by a granted extension. Note Revenue 2022-32 only applies to estates not required to file an estate tax return.

The IRS was swamped by estates requesting an extension to elect portability regarding the DSUE. A high percentage of these requests were determined to come from the estates of taxpayers who died within five years preceding the date of the requests for portability. As a result, the IRS extended the period to five years.

The estate executor must complete and properly prepare Form 706, the United States Estate and Generation-Skipping Transfer Tax Return, within five years of the taxpayer’s death. In addition, the executor of the estate must state at the top of Form 706 that the return is “Filed Pursuant to Revenue Procedure 2022-32 to Elect Portability under Section 201(c)(5)(a)” to fulfill portability requirements.

Executors who have not made the portability election must file Form 706 within five years of the decedent’s death. Speak with your estate planning attorney to be sure this is done in a timely manner. While the federal exemption for estate taxes is currently very high, the law will decrease by half on January 1, 2026, when more estates will need to pay federal estate taxes.

Reference: The CPA Journal (August 2023) “Portability of Deceased Spousal Unused Exclusion Extended”

Start Planning Now for Coming Changes in Estate Tax Exemption Levels

July 7, 2023

The historically high federal estate tax exemption will sunset on December 31, 2025. It may sound like there’s plenty of time to change your estate plan, but according to an article from Think Advisor, “Act Now to Avoid Estate Planning Logjam in 2025,” the time to start planning is now.

Your estate planning attorney will be in high demand over the next two years as more and more people realize their estate may be subject to the new lowered levels of the federal estate tax. Estate planning is a complex process; any strategy may take years to implement fully.

The 2017 Tax Cuts and Jobs Act delivered some of the most sweeping changes in federal tax law in nearly three decades. At the time, the exclusion amount for estate, gift and generation-skipping transfer tax purposes increased from $5 million to $10 million and was indexed for cost-of-life adjustments starting in 2010.

For anyone who dies in 2023, the exemption amount is nearly $13 million, or a combined exemption of a little less than $26 million for married couples.

The increase in the exclusion only applies to estates of decedents dying after December 31, 2017, before January 1, 2026, and to gifts made during that period. On January 1, 2026, the exemption returns to $5 million per person, indexed for cost of living.

You don’t have to die to take advantage of these generous exemptions. However, you still need to enact some of the various strategies to move wealth out of your estate and be sure that such strategies are appropriately supported legally.

Start by realistically assessing your entire net worth, looking beyond your investment portfolio. Include the value of any assets included in your taxable estate. You’ll also need to know how much exemption remains if you’ve already engaged in some legacy planning.

Consider gifting assets to a qualified charity as one of the most effective ways to reduce the size of your estate.

If your focus is keeping wealth in the family, there are several strategies to pass wealth to the next generation while living and after you have died. Some are relatively straightforward, such as making annual gifts, while others are complex, including transferring assets to trusts or creating generation-skipping trusts.

Now is the time to meet with your estate planning attorney to determine which strategies could be used to reduce your taxable estate in light of the lowered exemptions.

Reference: Think Advisor (May 22, 2023) “Act Now to Avoid Estate Planning Logjam in 2025”

Prepare Now for Coming Estate Tax Changes

June 30, 2023

The TCJA nearly doubled the lifetime estate and gift tax exemption from $5.6 million for individuals (and $11.18 million for married couples) to $11.18 million and $22.36 million for married couples), indexed for inflation after 2018. Right now, the exemption stands at $12.92 million per person and $22.84 million for couples, as reported in a recent article, “How To Prepare Clients Now For Looming Estate Tax Changes” from Financial Advisor.

All this changes on January 1, 2026, resulting in a roughly 50% reduction over the next few years. Individuals could see their federal estate tax exemption dipping to approximately $7 million, while couples could see a decrease to $14 million.

In anticipation of this drastic change, estate planning attorneys are reviewing plans now with clients to implement an appropriate course of action in less than three years. This is especially important for clients who might not have been impacted by estate tax laws in the past but who will be in 2026 because of a combination of the lowered amount and any growth in their assets.

Here are some strategies for preparing for the new lowered levels:

Review the complete estate plan with an estate planning attorney. Without a proper estate plan, it’s easy to lose sight of the value of all assets and may be entirely in the dark concerning estate tax liabilities. For instance, a boomer who hasn’t reviewed their estate plan in twenty years could see an enormous change in the size of their assets, possibly bringing them across the $7 million estate tax exemption threshold. Failing to address this could risk financial security in retirement and significantly impact their heirs.

Create a strategy with the information you have now. First, review your estate plan with an eye to moving assets out of the estate. You should then consider the overall goals and time horizons to determine the best way forward. There are several optimal strategies, including using annual gift tax exclusion, which as of 2023, is up to $17,000 per person.

The use of trusts is a well-known facet of estate planning. Which type of trust is used depends upon your specific situation. Trusts generate income and protect access to assets used for living expenses, reduce taxation on the estate, protect assets from creditors and keep a family’s financial assets and affairs private upon death.

Other strategies to consider:

Allocating assets to a 529 education plan, allows you to put money aside for the education of loved ones. It can be used for education from kindergarten to college, graduate coursework and more. There is also an option of accelerating gifting by giving up to five years of contributions in one year per individual.

Suppose you wish to pass assets to grandchildren, instead of gifting them during their lifetimes. Consider generation-skipping trusts, which allow you to create a separate fund for grandchildren under age 37.

There is no one-size-fits-all approach to estate planning. However, a discussion with your estate planning attorney will clarify your wishes and allow you to plan for the future.

Reference: Financial Advisor (May 8, 2023) “How To Prepare Clients Now For Looming Estate Tax Changes”

What You Need to Know About Estate Taxes

May 30, 2023

Most Americans don’t have to worry about federal estate and gift taxes. However, if you’re even moderately wealthy and want to transfer wealth to your children and grandchildren, you’ll want to know how to protect your ability to pass wealth to the next generation. A recent article from Woman’s World, “If You’re Rich, Read This—Your Estate Taxes Could Be at Stake (And Your Kids at Risk of Losing Their Inheritance” provides a good overview of estate taxes. If any of these issues are relevant to you, meet with an experienced estate planning attorney to learn how your state’s tax laws may impact your children’s inheritance.

A well-created estate plan can help you achieve your goals and minimize tax liability. There are three types of taxes the IRS levies on gifts and inheritances.

Few families worry about federal estate taxes for now. However, this will change in the future, and planning is always wiser. In 2023, the federal estate tax exemption is $12.92 million. Estates valued above this level have a tax rate of 40% on assets. People at this asset level usually have complex estate plans designed to minimize or completely avoid paying these taxes.

An estate not big enough to trigger federal estate taxes may still owe state estate taxes. Twelve states and the District of Columbia impose their own state taxes on residents’ estates, ranging from 0.8 percent to 20 percent, and some have a far lower exemption level than the federal estate tax. Some begin as low as $one million.

Six states impose an inheritance tax ranging between 10 percent and 18 percent. The beneficiary pays the tax, even if you live out of state. Spouses are typically exempt from inheritance taxes, which are often determined by kinship—sons and daughters pay one amount, while grandchildren pay another.

Taxpayers concerned about having estates big enough to trigger estate or inheritance taxes can make gifts during their lifetime to reduce the estate’s tax exposure. In 2023, the federal government allows individuals to make tax-free gifts of up to $17,000 in cash or assets to as many people as they want every year.

A couple with three children could give $17,000 to each of their children, creating a tax-free transfer of $102,000 to the next generation ($17,000 x 3 children x 2 individuals). The couple could repeat these gifts yearly for as long as they wished. Over time, these gifts could substantially reduce the size of their estate before it would be subject to an estate tax. It also gives their heirs a chance to enjoy their inheritance while their parents are living.

It should be noted that gifts over $17,000 in 2023 count against the individual estate tax limit. Therefore, your federal estate tax exemption will decline if you give more than the limit. This is why it’s essential to work with an estate planning attorney who can help you structure these gifts and discuss other estate tax and asset protection strategies.

Reference: Woman’s World (April 5, 2023) “If You’re Rich, Read This—Your Estate Taxes Could Be at Stake (And Your Kids at Risk of Losing Their Inheritance”

Bernie Sanders Again Presents Plan for Higher Estate Taxes

May 12, 2023

Sen. Bernie Sanders, with Senator Elizabeth Warren and Representative Jimmy Gomez, are introducing new legislation targeting heirs who receive over $3.5 million. Named the: For the 99.5 Percent Act,” the proposed bill would impose a 45% tax on estates worth $3.5 million and a 65% tax on estates worth over $1 billion.

It’s similar to legislation that Sanders has tried to get passed in several variations over the last few years. It comes as some Republicans seek to roll back the estate tax entirely, says Insider’s recent article entitled, “Bernie Sanders once again wants to raise taxes on rich heirs.”

“It is unacceptable that working families across the country today are struggling to file their taxes on time and put food on the table while the wealthiest among us profit off of enormous tax loopholes and giant tax breaks,” Sanders said in a press release.

The amount of money exempt from the estate tax has increased significantly over the last two decades. For 2023, the tax exemption stands at just under $13 million, a large bump from around $12 million in 2022.

As of 2019, the most recent year for which the IRS has data, only 0.08% of adult deaths were eligible for the estate tax. The Tax Policy Center likewise saw that fewer than 0.1% of people who would die in 2020 would owe estate tax. The estate tax rate only goes up to 40% on estates worth a million dollars more than the exempted amount.

The senator’s proposed legislation also seeks to address the loopholes that the ultra-wealthy can use to protect their assets from taxation, like dynasty trusts that don’t incur estate or gift taxes when the family doles out money from a passed-down trust.

However, like Sanders’ previous attempts to hike taxes on the rich, the proposal is unlikely to make it far.

Even when Democrats held both chambers of Congress, centrist sentiment stalled proposed hikes on big corporations and closing loopholes for private equity investors.

With tax-averse Republicans holding the House, any legislation to hike rates will not be successful.

Reference: Insider (April 18, 2023) “Bernie Sanders once again wants to raise taxes on rich heirs”

What Is the Meaning of Step-Up in Basis?

April 26, 2023

This aspect of the tax code changes the value—known as the “cost basis”—of an inherited asset, including stocks or property. As a result, the heir may receive a reduction in the capital gains tax they must pay on the inherited assets. For others, according to the recent article, “What Is Step-Up In Basis?” from Forbes, it allows families to avoid paying what would be a normal share in capital gains taxes by passing assets across generations. Estate planning attorneys often incorporate this into estate plans for their clients to minimize taxes and protect assets.

Here’s how it works.

If someone sells an inherited asset, a step-up in basis may protect them from higher capital gains taxes. A capital gains tax occurs when an asset is sold for more than it originally cost. A step-up in basis considers the asset’s fair market value when it was inherited versus when it was first acquired. This means there has been a “step-up” from the original value to the current market value.

Assets held for generations and passed from original owners to heirs are never subject to capital gains taxes, if the assets are never sold. However, if the heir decides to sell the asset, any tax is assessed on the new value, meaning only the appreciation after the asset had been inherited would face capital gains tax.

For example, Michael buys 200 shares of ABC Company stock at $50 a share. Jasmine inherits the stock after Michael’s death. The stock’s price is valued at $70 a share by then. When Jasmine decides to sell the shares five years after inheriting them, the stock is valued at $90 a share.

Without the step-up in basis, Jasmine would have to pay capital gains taxes on the $40 per share difference between the price originally paid for the stock ($50) and the sale price of $90 per share.

Other assets falling under the step-up provision include artwork, collectibles, bank accounts, businesses, stocks, bonds, investment accounts, real estate and personal property. Assets not affected by the step-up rule are retirement accounts, including 401(k)s, IRAs, pensions and most assets in irrevocable trusts.

If someone gives a gift during their lifetime, the recipient retains the basis of the person who made the gift—known as “carryover basis.” Under this basis, capital gains on a gifted asset are calculated using the asset’s purchase price.

Say Michael gave Jasmine five shares of ABC Company stock when it was priced at $75 a share. The carryover basis is $375 for all five stocks. Then Jasmine decides to sell the five shares of stock for $150 each, for $750. According to the carryover basis, Jasmine would have a taxable gain of $375 ($750 in sale proceeds subtracted by the $375 carryover basis = $375).

The gift giver is usually responsible for any gift tax owed. The tax liability starts when the gift amount exceeds the annual exclusion allowed by the IRS. For example, if Michael made the gift in 2018, he could avoid gift taxes on a gift he gave to Jasmine that year with a value of up to $15,000. This gift tax exemption for 2023 is $17,000.

Reference: Forbes (March 28, 2023) “What Is Step-Up In Basis?”

Does Estate Tax Have an Impact on My Plans?

April 24, 2023

Yahoo Finance’s recent article entitled “This Is How Much Estate Taxes Will Cost You in Florida” explains that Florida abolished its estate tax in 2004. Before that, federal law allowed a credit for death taxes at the state level but on the federal tax return. When you filed your state taxes, the federal government changed the credit to a deduction. In Florida, the estate tax was based solely on the federal credit, so the state no longer needed the tax.

Thankfully, Missouri has no estate tax.

Estate taxes are imposed by the government on the estate of a recently deceased person.

These taxes only apply to estates worth a certain amount, which varies based on where the tax is levied. You may have heard the term “death tax.” However, it’s really an estate tax. This tax differs from the inheritance tax, which is levied on money after it has been passed on to the deceased’s heirs.

Florida has no inheritance tax. However, other states’ inheritance taxes may apply to you. In Pennsylvania, for example, the inheritance tax may apply to you, even if you live out of state and the deceased lived in the state.

Florida has a no gift tax. The federal gift tax exemption is $17,000 in 2023. Gifting more than that to one person in a year counts against your lifetime exemption of $12.92 million.

Even though Florida doesn’t have an estate tax, you might still owe the federal estate tax. This is triggered for estates worth more than $12.92 million in 2023. As a result, estates worth less than $12.92 million won’t pay any federal estate taxes at all. However, if your estate is more than that, any money above that mark will be taxed.

The federal estate tax exemption is “portable” for married couples. What does that mean? If a married couple plans appropriately, they can have an exemption of up to $25.84 million after both spouses have died. The highest tax rate is 40% if an estate exceeds that amount.

The state sales tax is 6%. However, considering local sales taxes, the average is 7.01%. Property taxes in Florida are right in the middle of the pack nationwide, with an average effective rate of 0.80%.

There’s been no estate tax in the state of Florida since 2005. However, even if you live in Florida, your estate may still owe a federal estate tax when you pass away. No matter how much you have in your estate, it’s essential to make proper plans so your estate is taken care of and your descendants are now stuck with a large tax bill. Ask an experienced estate planning attorney for help.

Reference: Yahoo Finance (March 27, 2023) “This Is How Much Estate Taxes Will Cost You in Florida”

What Strategies Minimize Estate Taxes?

March 15, 2023

The gift and estate tax benefits from the Tax Cuts and Jobs Act (TCJA) are still in effect. However, many provisions will sunset at the end of 2025, according to a recent article “Trust and estate planning strategies” from Crain’s New York Business.

The most important aspect for estate planning was the doubling of the estate, gift and generation-skipping transfer tax exemptions. Adjusted for inflation, the current federal estate, gift and GST exclusion is $12.92 million in 2023. This is more than double the pre-TCJA amount, which will return in 2026, unless Congress makes any changes.

While these levels are in effect, there are strategies to consider.

Maximize gifting up to the 2023 annual exclusion of $17,000 per taxpayer, or $34,000 for married couples.
Depending on the value of the entire estate, consider strategies to keep it below the current exemption among of $12.92 million or $25.84 (married). If the estate is less than the exemption amount, no federal estate tax will need to be paid.
Plan charitable giving, including charitable IRA rollovers to make the most of the deduction on 2023 income tax returns. Qualified charitable distributions made directly from an IRA could be used to satisfy Required Minimum Distributions (RMDs) and exclude them from taxable income.
Set up 529 Plan accounts for children and/or grandchildren and consider making five years of annual exclusion gifts. Take into account any gifts made during the year to children and/or grandchildren when doing this.
Submit tuition or any non-reimbursable medical expenses directly to the school or medical provider to avoid having these amounts count towards the annual or lifetime gift tax exemption.
Explore intrafamily lending, which is used to transfer partial earnings to family members without lowering the lifetime estate tax exemption or triggering gift taxes.
Re-evaluate insurance coverage, which can provide opportunities to defer or avoid income taxes, or both, and provide assets to pay estate taxes or replace assets used to pay estate taxes.

Not all of these steps will be appropriate for everyone. There are also additional planning steps available that are not listed above. However, understanding the options and discussing with your estate planning attorney will ensure that you are using the most effective strategies to achieve wealth preservation.

Reference: Crain’s New York Business (Feb. 13, 2023) “Trust and estate planning strategies”

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