If you have significant wealth, you may be exposed to future estate tax burdens that must be acted on before the Tax Cuts and Jobs Act reduces the estate tax exemption in 2026. Developing and implementing proper estate planning and tax strategies takes time. You may need to prepare even if the estate tax continues at its current level or is cut in half. This means strategizing to minimize your estate tax liability now.
Meet the Andersons, a well-off family living in a state with a high cost of living. Robert Anderson, the father, is a successful entrepreneur who built a thriving business over the years. His wife, Sarah, is an accomplished artist, and together they have accumulated a substantial estate of $12 million each, for a total of $24 million. Their estate primarily consists of their business assets, valuable artwork, life insurance, a family residence, a vacation home, and other lucrative investments. They have two adult children, James and Emily, who are actively involved in the family business.
With the generous federal estate tax exemption set at $10 million adjusted for inflation per individual in 2017, steadily increasing to $13.61 million in 2024, the Andersons have felt relatively secure about avoiding estate taxes. Their primary concern has been preserving the family legacy and ensuring a smooth transition of their assets (business, accounts, and property) to the next generation. They had taken some initial estate planning steps, such as creating a will, creating lifetime protective legacy trusts for their children (to protect each child’s inheritance from lawsuits, creditors, bad marriages, divorces, and future estate taxes), discussing the use of a family limited partnership, and exploring gifting strategies to gradually transfer the assets to their children.
If the estate tax exemption drops to $5 million, adjusted for inflation, the Andersons may face several estate tax issues that require professional advice and assistance before the end of 2025. The Andersons need to find other ways to protect their money and property.
The family business represents Andersons’ estate, and sunsetting the higher exemption amount could have profound implications for its continued viability. Robert and Sarah must develop a comprehensive business valuation and succession plan to minimize the total estate tax burden and ensure a smooth ownership transition to James and Emily later.
Given the potential changes in the estate tax landscape, the Andersons need to revisit the valuation of their financial accounts, retirement and life insurance investments, personal property, real estate, and artwork to ensure accurate assessments. Then, they need to determine which items will affect the estate tax calculation and any remaining exemption they have left from prior legacy planning. Depending on their assets’ values, these items can quickly put them over the potentially soon-to-be lower estate tax exemption, exposing them to a 40 percent tax rate (which could be higher if they live in a state with its own estate tax).
With the uncertainty surrounding the estate tax exemption, the Andersons may want to consider accelerated lifetime gifting strategies to reduce their taxable estate while the higher exemption is in place. The Internal Revenue Service declared in 2019 that individuals who take advantage of the increased gift tax exclusion from 2018 to 2025 will not be negatively affected after 2025 if the exclusion amount drops.[1] Gifting up to $13.61 million each in 2024 or 2025 has a zero estate or gift tax liability. However, gifting over $7 million in 2026 may have significant gift tax consequences.
The Andersons may want to use life insurance to ensure that their loved ones are provided for at their passing. They might create an irrevocable life insurance trust to own the policy and receive the death benefit. This removes the policy's value from the Andersons’ estate and protects the death benefit for their chosen beneficiaries.
The significant portfolios of high-net-worth and ultra-high-net-worth families may require advanced tax planning techniques, including a bypass, marital or QTIP trust, to optimize each spouse’s estate and generation-skipping transfer tax exemption and potentially minimize their estate tax liability. At the client’s death, an amount equal to the current estate tax exemption amount is placed in one trust, which uses the exemption, and the remainder is placed in a second trust for the surviving spouse’s benefit, which qualifies for the unlimited marital deduction. This results in no estate tax being owed at the first spouse's death.
Spouses can give each other unlimited money and property without worrying about estate or gift tax. Because of this, some clients may not have an estate tax issue at the first spouse’s death because everything (or a substantial portion) went to the surviving spouse. The deceased spouse's exemption is unnecessary because they are utilizing the unlimited marital deduction. However, even if so, it may be advisable to file an estate tax return at the first spouse’s death to document how much of that deceased spouse’s exemption is being used and that the remainder is going to the surviving spouse. This will allow the surviving spouse to add the deceased spouse’s unused estate tax exemption to the surviving spouse’s estate tax exemption amount and apply that combined amount against the surviving spouse’s estate at the time of death.
If the Andersons are philanthropically inclined, another great option would be to engage in charitable giving through a charitable remainder trust. Setting up this trust can be time-consuming. Sometimes, the process is straightforward but often highly complex, requiring planning and consideration.
Suppose your situation is like Andersons. In that case, expert guidance is necessary to address estate tax issues and help you evaluate the impact of the potential sunsetting of the higher estate tax exemption amount on your estate. Contact the team at Altman & Associates at 301-468-3220 or through our website at altmanassociates.net to learn more about strategies to protect, preserve, and pass down valuable property.
