For some higher-net-worth individuals and families, the passage of the Tax Cuts and Jobs Act (TCJA) in 2017 brought adjustments to their estate planning strategy. The act, which included some of the biggest changes to tax law in decades, doubled the lifetime gift and estate tax exemption. In 2024, the lifetime gift and estate tax exemption amount, which is adjusted annually for inflation, is $13.61 million per individual, meaning a married couple can give away up to $27.22 million during their lifetimes or at death without incurring gift or estate taxes. These exemption amounts, along with other tax reforms in the TCJA, are currently scheduled to expire at the end of 2025.
"As we enter the second half of 2024, we are clearly approaching TCJA's dusk," says David Peterson, head of Advanced Wealth Solutions at Fidelity. If the estate and tax provisions in TCJA expire as scheduled, the current lifetime estate and gift tax exemptions will be cut roughly in half, to approximately $7.5 million per individual ($14.5 million for a married couple), depending on inflation adjustments.
What is the likelihood that the estate tax exemption will be extended?
Ultimately, the fate of the estate tax exemption as well as other tax provisions in the TCJA likely depends on which party is in control in 2025 in both the White House and Congress after November's elections. Democratic nominee Kamala Harris has endorsed legislation that would cut the estate tax exemption to below pre-TCJA levels. Former President Trump would likely support extending the TCJA tax cuts, including the estate tax exemption, if he wins a second term. "However, Republican leaders in Congress may have less appetite for extending all expiring tax cuts given the $4 trillion price tag and concerns about the national debt," says Alice Joe, a vice president on Fidelity's Government Relations team.
In the past few years, lower tax revenues coupled with increased spending and higher interest rates have driven the US deficit higher, leading to increased borrowing and debt. Recently, the national debt reached an all-time high relative to the GDP, and is predicted to hit the debt ceiling again in early 2025. "The debt ceiling issue could potentially influence the future of the TCJA," Joe says. "That, and the outcome of November's election, makes it really hard right now to predict what's going to get renewed and what's going to expire."
Planning in a time of uncertainty
"Without a crystal ball, trying to predict the future of the TCJA is a wasted exercise," Peterson says. "Consider planning strategies that offer flexibility and aim to support families in achieving their long-term financial and legacy goals." He offers some examples below.
Annual gifting: Each year, every individual can give up to the amount of their annual exclusion ($18,000 in 2024) to as many people as they like without incurring any gift tax liabilities. In addition, you can make a one-time gift to a 529 plan that accelerates 5 years' worth of annual exclusion gifts. You may also want to consider making larger gifts that utilize the current lifetime exemption: The IRS clarified in 2019 that large gifts made before the sunset will not be subject to clawbacks. "Clients who have or think they may eventually have assets in excess of the post-sunset exemption may wish to consider gifting assets prior to 2026 if they haven't done so already," says Peterson.
An irrevocable trust: Higher-net-worth families who want to shift assets outside of their taxable estate may want to consider funding their legacy goals ahead of 2026 by creating an irrevocable trust and gifting assets into that trust. Many options and strategies are available which can remove the potential appreciation of assets from the estate, with some utilizing little to no gift tax exemption.
Life insurance: "Life insurance can play a significant role in helping families plan for the reduced estate tax exemption," says Peterson. Death benefits can play a critical role in providing families with liquidity to settle an estate or potentially offsetting an increased estate tax liability. However, while death benefits are generally exempt from income taxes, they are usually considered part of a taxable estate. Some families may find it beneficial to set up an irrevocable life insurance trust (ILIT), which can offer liquidity that is not included in their estate for tax purposes. "When the policy is owned by a properly drafted and funded irrevocable life insurance trust, the death benefit is excluded from estate tax calculations," says Peterson.
Consider getting help
Anyone who may want to make changes to their estate plan shouldn't wait for the TCJA sunset, cautions Peterson. "We are hearing feedback from attorneys that they anticipate having limited to no capacity to accommodate last-minute client requests to update plans, draft new plans and assist with funding," he says. You may also want to consult with a financial professional to help you assess how you might adapt your plan in the event tax laws change this year, and how any changes might impact your finances. For example, gifting assets during life, either directly or in trust, could impact your ability to fund your lifestyle, now or in the future. Careful cash-flow planning should accompany such analysis to help ensure that gifting assets is an affordable long-term strategy.
No matter the outcome of the election, the ideal plan is one that's tailored to your family's specific goals and objectives and allows for flexibility. "The TCJA sunset presents both challenges in the form of potentially higher income tax rates, as well as potential opportunities," Peterson says, "A plan that balances these competing changes will ultimately provide you with the most options heading into 2025."