While deciding how you want your assets distributed after you pass away may be your primary estate planning goal, protecting those assets should be an equally important estate planning goal. To successfully achieve that objective, you need to understand current tax laws and incorporate those laws into your overall estate plan. To get you started, the Vero Beach estate planning attorneys at Kulas Crawford & Smith urge you to ask yourself if you are prepared for the estate tax exemption rollback scheduled to happen soon.
What Is the Federal Gift and Estate Tax?
The federal gift and estate tax is effectively a tax on the transfer of wealth that is collected from the estate of a taxpayer during the probate of the estate. Every taxpayer is potentially subject to federal gift and estate taxes which apply to the combined value of all qualifying gifts (almost all gifts are considered “qualifying” gifts) made during a taxpayer’s lifetime and assets owned by the taxpayer at the time of death. Historically, the federal gift and estate tax rate was subject to change and frequently did change. The American Taxpayer Relief Act of 2012 (ATRA), however, permanently set the rate at 40 percent. To illustrate how the tax works, imagine you made gifts during your lifetime totaling $5 million in value and your estate at the time of your death is valued at an additional $10 million. The combined total of $15 million would be subject to federal gift and estate taxes. Without any deductions or adjustments, your estate would owe a staggering $6 million to Uncle Sam in federal gift and estate taxes.
How Does the Lifetime Exemption Work?
You undoubtedly want to avoid losing 40 percent of your estate to taxes. Fortunately, each taxpayer is entitled to take advantage of the lifetime exemption to reduce the amount of taxes owed. Like the tax rate, the lifetime exemption historically changed from year to year until ATRA set the lifetime exemption amount at $5 million, to be adjusted annually for inflation. In 2018, however, the Tax Cuts and Jobs Act (TCJA) went into effect. The TCJA represented legislation that increased the lifetime exemption amount for 2018 and for several years thereafter.
For 2024, the individual lifetime exemption amount is $13.61 million, meaning a married couple can shield a total of $27.22 million from federal gift and estate taxes. To put those figures in perspective, that same $15 million estate would only pay gift and estate taxes on $1.39 million after deducting the lifetime exemption, reducing the tax liability from $6 million to $556,000, a savings of over $5.4 million.
Preparing for the Estate Tax Rollback
While taxpayers have made good use of the TCJA lifetime exemption increase, everyone will get a harsh reminder in the relatively near future that the increase was only intended to be temporary. Unless Congress makes the change permanent, the provision of the TCJA that increased the lifetime exemption will “sunset” on January 1, 2026. When that happens, the lifetime exemption will revert back to $5 million, adjusted for inflation in the intervening years between 2018 and 2026. You could go to sleep on December 31, 2025, without worrying about federal gift and estate taxes and wake up on January 1, 2026, knowing that your estate would owe Uncle Sam a small fortune if you passed away.
What Can I Do about the Estate Tax Rollback?
One of the many reasons to schedule routine reviews of your estate plan is to make sure that changes in the applicable tax laws are addressed in your plan. The upcoming change to the lifetime exemption limit is a perfect example of how changes in the tax laws can have a dramatic impact on your estate plan. Now is the time to discuss how the rollback will impact your estate plan with your estate planning attorney. By planning for the rollback, you can limit the negative impact the change will have on your estate.
Do You Have Questions about the Upcoming Estate Tax Exemption Rollback?
To learn more, please join us for an upcoming FREE seminar. If you have additional questions or concerns about how the estate tax exemption rollback will impact your estate, please contact an experienced Vero Beach estate planning attorney at Kulas Crawford & Smith by calling (772) 398-0720 to schedule a consultation.
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