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Navigating the Future: Anticipated Changes to Estate Taxes and Why You Should Act

Navigating the Future: Anticipated Changes to Estate Taxes and Why You Should Act

June 20, 2023

As a Certified Financial Planner (CFP) professional, one of my top priorities is staying ahead of the curve and keeping my clients informed about potential tax law changes and the risks and opportunities that come with them. Estate tax laws are especially hard to predict. That makes planning for them a challenge, but the current high estate tax exemption creates a unique, likely temporary, opportunity to move wealth tax-free. Whether or not that’s an opportunity you want to take advantage of, understanding your estate tax risk is a critical first step in protecting the legacy you’ll someday leave your family.

The Landscape of Estate Taxes

Under the current law, each individual can give away, during their life, or leave at their death, up to $12.92 million without any federal estate or gift tax. A married couple can give or leave up to $25.84 million. Transfers in excess of that amount are taxed at 40%. The good news is that the exemption is as high as it’s ever been, so the opportunity to transfer assets tax-free has never been greater. The bad news is that the current law has a built-in “sunset.” Unless Congress enacts new legislation, the exemption amount will be cut in half, effective January 1, 2026.

Estate tax law is notoriously volatile. It’s hard to predict what Congress will do. They could extend the current exemption, reduce it by half early, or set it at a different amount. Or they could do nothing and let the sunset happen in 2026. But in any case, it’s not safe to assume that the $12.92 million exemption will be available for much longer. 

 It’s also important to keep in mind that some states have their own separate estate taxes, with varying thresholds and rates.  

What’s in an Estate?

To get a handle on your potential estate tax liability, you first need to understand what comprises a taxable estate. A taxable estate includes all the assets that you own in your own name, such as life insurance, annuities, business interests, cash and securities, IRAs and 401(k)s, vehicles, jewelry, art, and collectibles. Assets in trusts may or may not be included as well. 

Taking an inventory of the type of asset you own is also very important, because it’s common for the estates of business owners, or people with large real estate portfolios, to be mostly liquid. Estate taxes must be paid in cash, in most cases within nine months of death, and that’s a challenge when the estate consists largely of shares of a family business. The estate is sometimes forced to sell business or property for less than the real value, or to borrow cash to pay the taxes.

 Impact on Your Legacy

Estate taxes have the potential to significantly diminish the wealth passed on to future generations. Imagine a scenario where a considerable portion of your hard-earned assets intended for your loved ones goes toward paying estate taxes. Without proper planning, your legacy could be compromised, and your beneficiaries might not receive the full benefits you intended for them. 

 Strategies to Mitigate the Impact

Gifting assets is the cornerstone of estate tax planning. While this can sometimes mean simply writing a check to your child, the best results come from more sophisticated strategies, usually involving trusts. While the estate tax exemption remains over $12 million per person, it’s possible to give assets in that amount to a trust, use up the exemption, and make sure that future growth on those assets takes place outside your taxable estate, rather than inside it. The IRS has issued guidance saying that these gifts will not be clawed back if the 2026 sunset does take place. This is really an unprecedented opportunity to transfer wealth in a tax-friendly way. 

Another idea is to make annual gifts to trust; everyone has the ability to gift $17,000 to any beneficiary they choose. These gifts don’t reduce the donor’s lifetime estate and gift tax exemption. That’s useful to reduce an estate gradually over time, while also providing a pool of funds to reinvest for the family. People will often make gifts to children and grandchildren in trust, rather than outright, and those gifted funds are then invested in life insurance, securities, real estate, or family business interests. While $17,000 may not sound like much compared to a multi-million-dollar estate, it can have real power when you gift consistently, year by year 

For many people, gifting strategies are more than enough to mitigate the estate tax risk. For others, gifting is just a baseline. Your attorney and tax advisors can help you evaluate your own situation and design a plan for the best results. 

Your Assignment

The important thing to remember is that estate planning is an ongoing project. You don’t need to think about it every day, but it does need to be revisited periodically to make sure you’re keeping up with changes in the law and taking advantage of opportunities. That’s why it matters who you work with. Good tax, legal, and financial advisors don’t just help you implement a plan, they act as your link to what’s happening in Congress and the state legislatures. They flag new risks and opportunities and help adapt your plan over time. The $12.92 million estate tax exemption makes this the perfect time to get your team in place.

Neither MML Investors Services nor any of its subsidiaries, employees or agents are authorized to give legal or tax advice. Consult your own personal attorney, legal or tax counsel for advice on specific legal and tax matters.  CRN202507-4587406