Maximizing Your Estate Tax Exemption: Act Now Before the 2025 Sunset
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Maximizing Your Estate Tax Exemption: Act Now Before the 2025 Sunset
The current estate and gift tax exemption is set to change dramatically in 2026, making now the ideal time to review and update your estate plan. Here’s what you need to know about the upcoming changes and how to take advantage of the current high exemption amount. Begining in 2027, the current tax code provides that the estate tax exemption will decrease to approximately 5 million per person, adjusted for inflation.
How much money can people exclude from estate and gift taxes?
When you die, you can leave up to $12.92 million (less any amounts previously given in excess of the annual exclusions) to your relatives or friends free of any federal estate tax.
What Is an Effective Estate Plan to use your estate tax exemption?
Using a combination of strategies creates an effective estate plan, including trust structures, generational planning, charitable planning, maximizing tax-advantageous accounts, and annual and lifetime gifting. The current heightened exemption limits mean that certain lifetime gifting strategies implemented before 2025 may be more effective in reducing your estate and estate tax. Once the curren exemption expires some estate tax exemption strategies may no longer be effective
What was the effect of the TCJA on the Estate Tax Exemption
The TCJA nearly doubled the lifetime estate and gift tax exemption from its previous levels. For 2024, the exemption is $13.61 million per person and $27.22 million for a married couple. This increase provided substantial planning opportunities for wealthy individuals to transfer assets without incurring federal estate taxes.
Who is Required to Pay Estate Tax?
Estate tax is generally required for estates exceeding the federal exemption amount. Under Internal Revenue Code § 2001, the estate tax applies to the transfer of property at death. California currently does not have a state-level estate tax.
Can my spouse use my lifetime exemption? If you’re married, your spouse is entitled to a separate $12.92 million exemption and can inherit your unused lifetime exemption by filing an estate tax return on form 706. Internal Revenue Code § 2010(c)(5)(A)
Portability, of the unused exemption amount, as provided in Internal Revenue Code § 2010(c)(4), Internal Revenue Code § 2010(c)(4), Internal Revenue Code § 2503(e)
You can make direct payment on behalf of another person for medical expenses or tuition without counting any of these payments toward the annual gift or GST tax exclusions or lifetime estate tax exemption. This provision is outlined in Internal Revenue Code § 2503(e).
How to create an Estate plan to Use the Estate Tax Exemption?
An effective estate plan to minimize taxes may include the following Lifetime Planning Options:
- Annual Exclusion Gifts: Utilize the annual gift tax exclusion, currently $18,000 per recipient for 2024 (IRC § 2503(b)).
- Establishing Trusts: Consider trusts like Intentionally Defective Grantor Trusts (IDGTs) or Spousal Lifetime Access Trusts (SLATs).
- Charitable Giving: Use Charitable Remainder Trusts (CRTs) to provide income tax deductions while reducing the taxable estate.
- Qualified Personal Residence Trusts (QPRTs): Transfer a personal residence to beneficiaries at a reduced gift tax value.
- Family Limited Partnerships: Transfer business interests while maintaining control and potentially qualifying for valuation discounts.
Next Steps for Estate Planning
- Inventory Assets: Create a comprehensive list of all assets and liabilities.
- Define Goals: Clearly outline your estate planning objectives.
- Consult Professionals: Work with experienced estate planning attorneys and tax advisors.
- Implement Strategies: Put chosen strategies into action before the TCJA sunset.
When Do I Need to Amend a Trust?
Revising the terms of a trust is known as “amending” the trust. An amendment is useually appropriate when there are only a few minor changes to make, such as: rewording a certain paragraph, changing the successor trustee, or modifying the beneficiaries. An amendment is good for small changes, like a patch to the trust and both documents (trust and amendment) must be kept as long as the trust is in effect. A trust can be amended any number of times. Call the San Francisco Estate Planning attorneys at the Bassin Law firm to assist you with drafting an amendment to your trust.
How to Amend a Trust in California
In order for an irrevocable trust to be changed or terminated in California without the approval of a court, the settlor and all beneficiaries must agree to the proposed changes. This unanimous written consent is often necessary for an amendment to proceed. To ensure that you and your loved ones can agree on a trust plan, a San Francisco California estate planning attorney can mediate any conflicts between the beneficiaries and help you amend your trust according to your wishes.