Scott Roberts, CPA, CLU
After the latest inflation adjustment, the current estate tax exemption stands at a towering $11.4 million per person, or $22.8 million per married couple. However, under the current law, with no further legislation, the exemption is scheduled to be reduced (in 2026) to $5 million per person, plus inflation since 2010. Some have estimated that would put the exemption at around $6.5 million per person in 2026 (rounded and based on a 2% estimated inflation rate). This has effectively created 3 groups of estates for planning purposes: Those under $6.5 million (or $13 million if married), those over $11.4 million (or $22.8 million if married), and then those in between $6.5 million and $11.4 million ($13 million and $22.8 million if married).
Estates valued at under $6.5 million ($13 million if married) are simple in that, from an estate tax point of view, significant planning is not necessarily required because estate taxes should not be due. However, appreciation of assets should be monitored as people often find themselves in a taxable situation when certain assets increase in value beyond their expectations. And, of course, remember to include the death benefit of life insurance in the total net worth number if the policy is personally-owned instead of owned in a trust.
Estates valued at over $11.4 million (or $22.8 million if married), while not being in a simple situation, at least have the benefit of clarity regarding taxation – they will be subject to estate tax barring future legislation. In this case, it makes sense to thoroughly explore the idea of gifting a portion or all the exemption during life instead of waiting until death to use it. Normally, there is one very good reason for this but now there are two. The usual reason is that any assets gifted now can appreciate outside the taxable estate and a tax savings can be realized equal to the value of the appreciation times the tax rate (currently 40%). But now there is an additional benefit when large amounts are gifted – if, say, $10 million is gifted now and the exemption is later reduced, most industry experts agree that, under current law, the IRS would not “claw back” the amount gifted over a future reduced exemption amount. So, for large estates who can comfortably gift the full $11.4 million ($22.8 million if married), it may make sense to gift the full amount now to take advantage of the currently-high exemption. And, to the extent people are worried about parting with such amounts, married people can gift into spousal lifetime access trusts (SLAT) to retain beneficial interest in the assets by the parents instead of simply gifting directly to the children (whether outright or, as is typically preferable, in trust).
Finally, there are the “tweener” estates between $6.5 million and $11.4 million (between $13 million and $22.8 million of married) that technically don’t have an estate tax problem now but will if/when the exemption is reduced. Interestingly, my recent experience with clients who fit this profile is that they tend to think of themselves as not subject to estate taxes, either now or in the future. They tend to believe that the $11.4 million exemption will be extended. While that may be the case, my opinion, and most industry experts agree, is that planning is most prudent when done according to the current law because nobody knows what will happen in the future. So, barring a terminal illness which would make death in the next 6 years probable, it makes sense to assume the exemption will be reduced and plan accordingly.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
Exemption amounts derived from www.irs.gov.