It’s hard to fathom that almost half of what you leave behind at passing might never actually reach your loved ones. With a hefty 40% federal estate tax, not to mention potential state-level taxes on top of that, any amount you can give tax-free significantly amplifies the impact of the gifts you bequeath to the next generation.
Currently, there are three ways to avoid federal estate tax:
- The marital deduction omits estate taxes for money and assets passing to a spouse.
- The 2024 annual gift exclusion dictates that each donor can give up to $18,000 per donee before estate taxes are applied.
- The unified credit stipulates the amount of assets in terms of value that you can transfer from one generation to the next without tax. Lifetime gifts and estate transfers were unified under an estate tax exemption of $5 million per person indexed to inflation in 2011.
In December 2017, the Tax Cuts and Jobs Act temporarily doubled the estate tax exemption through Dec. 31, 2025. With inflation, the 2024 exemption is set at $13.61 million per person. Once this legislation expires, the exemption limit will automatically reduce back to $5 million indexed to inflation — an estimated $6.8 million per person.
The sunset of the federal estate tax exemption may seem far off, but in reality, there’s less than two years to maximize the increased tax-free limit. The decisions you make now could mean the difference in thousands or even millions for your family later.
Here are three creative, proactive ways to give now while mitigating the risks of doing so:
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1. Exhaust one spouse’s “bonus” exemption
It’s common practice for spouses to share the gift-giving 50/50. But in the face of the exemption sunset, it is prudent to use one spouse’s $13.6 million exemption cap now and preserve the second spouse’s exemption for use after the sunset.
Case in point: Tom and Mary have a $20 million estate and plan to give $13 million in 2024.
Option A: Tom and Mary split the gift equally, and they reduce their exemption amounts to $6.5 million. When the increased exemption sunsets in 2026, Tom and Mary have both already used $6.5 million of their $6.8 million exemption, leaving a combined exemption amount of just $600,000 moving forward.
Option B: Tom gives the full $13 million from his exemption today, while Mary’s remains completely intact. In 2026, she still has the full $6.8 million exemption amount to take advantage of after the exemption limit decreases.
A simple, thoughtful choice today could mean the difference of over $6 million tomorrow.
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2. Leverage predictive technology and statistical analysis
Expert financial planners can use sophisticated tools to project your future lifestyle needs with high accuracy. Using market analysis and a Monte Carlo simulation (a model of probability that can be used for risk assessment and financial forecasting) while layering in your portfolio, inflation, spending and cash flow simulations will estimate the amount of money you’ll most likely require for the rest of your lifetime. This insight empowers you to make better-informed, more aggressive decisions about how much to give away before the sunset, even before you feel fully ready to do so.
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3. Use a spousal lifetime access trust (SLAT)
While the power of technology goes far in helping to inform gifting decisions, many still worry. What if the market changes unexpectedly or our lifestyle needs shift, requiring more money to maintain our quality of life?
SLATs are an especially effective tool in anticipation of the federal tax exemption sunset, and they mitigate concerns of overgifting too early. These trusts are designed to give your spouse access to funds while still using your own exemption and effectively transferring it out of your estate. SLATs enable you to set aside money for your children and provide your spouse with resources for a wide range of needs that fall under the categories of health, education, maintenance and support. SLATs are typically grantor trusts, though, so be sure to consult a qualified wealth adviser to understand any income tax implications before implementing.
A ripple effect for generations to come
Now is the time to plan for how to maximize the tax exemption increase before it’s too late. The right strategy can bring peace of mind, allowing you to give boldly and comfortably with the right safety nets in place.