As 2025 approaches, many Californians are keen to understand the impending changes to the estate tax exemption. The upcoming reduction, commonly referred to as the “sunset” of the current thresholds, could have significant implications for estate planning and wealth management. If your estate plan might be affected by the reduction in the estate tax exemption, it’s crucial to review and possibly revise your strategy. Our Trust attorney at Keyes Law Group in San Jose, CA, can provide guidance tailored to your specific situation.
What is the Estate Tax Exemption?
The estate tax, colloquially termed the “death tax” by some, is a federal tax applied to the transfer of assets from the deceased’s estate to their heirs. Essentially, it is a tax on the right to transfer property at your death. Under current law, there is an exemption level below which no estate tax is levied. The amount each individual can pass on without these taxes is known as the estate tax exemption.
For 2023, the federal estate tax exemption is set at about $12.92 million per individual, allowing a married couple to shield approximately $25.84 million from federal estate taxes through portability. This exemption is indexed for inflation, which adjusts the threshold annually.
This exemption was not always so high. The Tax Cuts and Jobs Act of 2017 significantly amended the Internal Revenue Code, effectively doubling the estate tax exemption from the previous figures of about $5.49 million for individuals and $10.98 million for couples. This act set the higher exemption amounts to sunset after 2025, meaning the exemption amounts will revert to their pre-2018 levels, adjusted for inflation.
Upcoming Changes in 2025
Starting in 2025, the exemption is expected to adjust back to approximately $5.5 million per individual and $11 million for married couples, depending on inflation rates at that time. This rollback will significantly reduce the threshold for estate tax liability, potentially affecting many more estates, especially in states like California where property values can escalate the total estate value rapidly.
For Californians, the implications of these changes are particularly striking due to the high cost of living and real estate prices in the state. Many residents who currently may not be close to the exemption threshold could find their estates subject to substantial taxes if proper planning is not undertaken.
Given these impending changes, it’s prudent for individuals and families to consider their estate planning strategies. Trusts, lifetime gifts, and other estate planning tools can help minimize the estate tax burden. The Internal Revenue Service (IRS) provides guidelines on what constitutes taxable estate, including the market value of these assets at the time of death, minus deductions like mortgages and other debts. For those particularly concerned or affected by the estate tax exemption changes, consulting with a knowledgeable estate planning attorney, is crucial.
Proactive Estate Planning Strategies
As the estate tax exemption is set to decrease significantly in 2025, it’s crucial to employ strategic estate planning to mitigate potential tax impacts. Here are several effective strategies that individuals might consider:
Gifting to Family Members
Utilizing the annual gift tax exclusion allows an individual to give up to $16,000 per recipient per year without incurring a gift tax or using any of the lifetime exemption amount. For married couples, this means potentially gifting $32,000 to each recipient annually. Additionally, making use of the lifetime gift exemption before the exemption amount decreases in 2025 could be a strategic move to pass on wealth without additional taxes.
Establishing Trusts
Trusts are versatile tools in estate planning. Consider these options:
- Irrevocable Life Insurance Trusts (ILITs): An ILIT can own your life insurance policy, removing the death benefit from your estate and thus reducing your estate taxes while providing liquidity to heirs.
- Grantor Retained Annuity Trusts (GRATs): This tool allows the grantor to transfer asset appreciation to beneficiaries, reducing the risk of estate taxes on future growth.
- Spousal Lifetime Access Trusts (SLATs): A SLAT permits one spouse to create a trust for the benefit of the other spouse, potentially allowing wealth transfer without immediate estate taxes and providing financial support to the spouse.
- Qualified Personal Residence Trusts (QPRTs): This allows you to transfer a personal residence to a trust while retaining the right to live there for a term of years, reducing the size of your taxable estate.
Charitable Giving Strategies
Charitable contributions can significantly reduce your taxable estate while benefiting the community:
- Charitable Remainder Trusts (CRTs): These trusts can provide you or other named individuals with a stream of income for a period of time, with the remainder going to a charity, which can be a tax-efficient way to handle high-value assets.
- Donor-Advised Funds (DAFs): DAFs provide an immediate tax deduction for the full donation amount while allowing you to distribute funds to charities over time.
Maximize Use of Portability
For married couples, portability allows the surviving spouse to use any unused federal estate tax exemption of the deceased spouse. Ensuring that estate plans are structured to make full use of this provision can double the amount shielded from federal taxes.
These strategies, if implemented effectively, can offer substantial benefits and protections against the future increase in estate taxation. Given the complexity of estate planning and the individual nature of each estate, consulting with a skilled professional is needed. To learn more about how these strategies can be tailored to your situation, schedule a consultation with us today.
Why Act Now?
The 2025 sunset of the current estate tax exemptions presents both challenges and opportunities. Proactive planning is key to navigating these changes effectively. Whether you’re establishing a new trust, updating an existing one, or exploring other estate planning avenues, Keyes Law Group, PC stands ready to help you secure your legacy. Don’t wait to adapt to these significant tax changes; reach out to us today to ensure your estate plan reflects your wishes and maximizes your financial legacy.