Estate Tax Exemption Will Fall – Now is the Time to Plan

As values of businesses, real estate, and investment portfolios continue to rise, now is the time to develop and implement an estate plan for taxpayers considering the future transfer of wealth. While legislative proposals in 2021 dropped any near-term changes in estate tax laws, the current estate tax exemption is still scheduled to be reduced by half in 2026. To minimize future tax bills, you may benefit from transferring some of your wealth sooner rather than later.

How Did We Get Here?

The Tax Cuts and Jobs Act of 2017 (TCJA) effectively doubled the federal estate tax exemption and provided for annual increases, enabling married taxpayers filing jointly to avoid taxation on the first $24 million of an estate in 2022. The exemption for single taxpayers is $12 million.

However, those provisions are scheduled to expire on December 31, 2025, sending the exemption levels down to pre-TCJA levels of $12 million for married taxpayers and $6 million for single taxpayers.

With rapid growth in recent years in the value of business holdings, real estate, and stock market investments, many taxpayers will find their estates over the exemption levels, exposing their estates to federal estate taxes.

It is possible that Congress could act to change the estate tax exemptions even before 2025, and the current administration has expressed a desire to do so. But the details of such a change are unknown currently and wishing for a “fix” from Congress is not the best estate planning strategy.

Estate plans should be reviewed and, if necessary, amended every three to five years. Given the certainty that the federal exemption will change within the next four years, the window of necessity is open now.

Where to Start

  • Review your estate plan to see if it’s still accurate and it accomplishes your goals. If your plan is more than two years old, chances are it will need to be updated. Be sure to look at the key mechanisms of your estate plan, including appointments of trustees, personal representatives, financial and healthcare powers of attorney, guardians and distribution provisions.
  • Review the value of your closely held companies, land and real estate. Real estate values are astronomical and are expected to continue rising through 2022. Given inflation and the political climate, it’s essential to project where you’re going to be when the estate tax exemptions are reduced. If the value of homes and commercial buildings were to stay where they are today, you might be fine. But they won’t, so you must plan.
  • If you are not already using them, consider new tools and strategies for transferring assets that will protect your estate from estate taxes. Devise a plan that is active rather than passive as we enter 2022. We recommend aggressive estate planning that includes the use of trusts such as Spousal Lifetime Access Trusts, Charitable Remainder Trusts. Grantor Retained Annuity Trusts and Irrevocable Life Insurance Trusts.  This is a time to use all the tools in the toolbox that currently exist in federal law.
  • If you are a partner in a business, revisit your buy-sell agreement to make sure it still aligns with your goals and includes mechanisms for setting a future price and funding a sale. If you’re relying on insurance to help fund obligations, revisiting coverage in light of any changes is also appropriate. If you don’t have a buy-sell agreement, create one now.

Change – the Only Certainty

The one thing that is certain is that the federal estate tax exemption will change in the next four years. Whether it is reduced by a new act of Congress or by the already existing TCJA is the only question. That means every taxpayer who has assets to pass on – a business, real estate, investments, art, a car collection – should be planning.

Don’t delay. The political winds shift quickly, and it’s better to be actively planning than passively sitting.

Contact your Rea advisor today to discuss your wealth transfer plan.

By Paul Weisinger, CPA/ABV, CVA, CEPA (Cleveland Office)