Planning Opportunities Ahead of the TCJA Sunset

In life being proactive is generally positive, but especially true of financial and estate planning.

Tax Cuts and Jobs Act (TCJA) of 2017 made several significant changes to the Code – some permanent and some temporary – that are set to sunset and expire after 2025. Congress may act to extend or make permanent some or all of the temporary provisions of TCJA, but this is currently an unknown. Therefore, for tax planning purposes, now may be the time to act before the sands shift again.

There are several Estate Tax planning opportunities available to individuals to help prepare for the sundown of the TCJA and to take advantage of today’s favorable tax laws. Of course, even if a planning opportunity does ultimately save taxes, it may still not be appropriate or the right fit for an individual depending on their unique circumstances.

Said differently, it is prudent to thoroughly review available planning ideas and opportunities with your advisory team to ensure all aspects of your decisions are evaluated, understood, and made with confidence.

Estate and Gift Taxation

The unified tax credit defines a dollar amount that an individual can gift during their lifetime and pass on to heirs before gift or estate taxes apply. The current unified credit has been adjusted for inflation annually and is currently $13,610,000 per person or $27,220,000 for a married couple filing jointly. At the end of 2025, the unified credit will basically be cut in half. A taxable estate in excess of the unified credit will be subject to estate tax at the rate of 40%.

With proper planning, a married couple will be able to take advantage of two unified credits (one for each spouse), but the unified credit amount will be limited to the amount available upon each spouse’s death (with the exception of portability). With portability, the first spouse to pass dies prior to 2026 and does not utilize his or her full unified credit. In this case, the unified credit will be limited to the greater of the amount of unified credit utilized on the first death or the amount available on the passing of the surviving spouse.

Planning Opportunities

Although most of the population will not be affected at all by the reduction in the unified credit, for those that will be, here are two opportunities available for consideration.

Gift Today

One basic planning opportunity is to take advantage of the unified credit amount available today by making a gift to family members (outright or in trust). In the case of a married couple, $27,220,000 could be gifted today and removed from their estates without generating any gift tax. The advantage to this is that not only is the larger amount of unified credit locked in, but the future growth of the assets gifted is also ultimately sheltered from estate tax.

Additionally, gifting of partial minority interests in certain assets (closely held business, real estate, etc.) can provide an additional boost to the true value of a gift via valuation discounts for lack of marketability and lack of control.

Spousal Lifetime Access Trust (SLAT)

If there is hesitancy to give up control of assets via gift because they may be needed for general living purposes in the future, there is an opportunity to have your cake and eat it too as the saying goes. A SLAT allows married couples to take advantage of the unified credit while still receiving income and/or limited distributions of principal from the gifted assets.

With a SLAT, one spouse (the grantor) transfers assets into an irrevocable trust that may benefit the other spouse as a beneficiary during their lifetime (as well as other family members, if desired). Beware – Upon the death of the beneficiary spouse, the assets will then pass to the remaining beneficiaries (outright or in trust) and the grantor spouse will not be able to benefit from the assets any longer.

In Summary

These are just two simple ways to make the most out of the unified credit amounts. There’s a whole range of other possibilities out there, like discount planning with Grantor Retained Annuity Trusts, Intentionally Defective Grantor Trusts, Qualified Personal Residence Trusts, and more.

If you’d like to dive deeper into any of these avenues, we’d love to hear from you. Please don’t hesitate to reach out to us.