Benjamin Franklin once wrote that “nothing is certain except death and taxes.” While we might want to argue with Mr. Franklin and attempt to add a few more items to that short and depressing list, he is driving at something important. We should all expect to die and to be taxed. Therefore, it would be wise to plan for both.
In so doing, we should be aware that the disposition of our assets following death will also be subject to taxation. This occurs through the federal estate tax on the fair market value of the assets that a person gives to others including “cash and securities, real estate, insurance, trusts, annuities, business interests, and other assets.”[1] When these assets are transferred to others following death, the estate tax will be levied against the fair market value of these assets.[2]
I have some good news and some bad news. The bad news is that the estate tax can range as high as 40% for estates worth more than $1,000,000.[3] The good news is a sizable exclusion on the amount of an estate that can be taxed, and that the Tax Cuts and Jobs Act (TCJA) of 2017 doubled the amount from $5,490,000 to $11,180,000.[4] Adjusted for inflation, the exclusion amount in 2025 is $13,610,000.[5] What is more, couples making a joint gift can double this amount yet again. This means that the estate tax will not apply at all if the total fair market value of an individual’s estate is less than $13,610,000 or if the value of a couple’s estate is less than $27,220,000.
Even so, the increased threshold for the exclusion is set to expire on December 31, 2025 reducing it by half down to $7,000,000 adjusted for inflation.[6]
Here is an example to illustrate the dramatic tax consequences the expiration of TCJA’s exclusions will have. Assume that a couple has an estate worth $20,000,000. Applying the reduced exclusion amount following the TCJA’s expiration, this would mean that the couple would have $13,000,000 ($7,000,000 excluded) worth of taxable assets in 2026 as opposed to only $6,390,000 ($13,610,000 excluded) in taxable assets in 2025. After assessing the 40% tax on estates worth greater than $1,000,000, this would mean $2,644,000 more in federal taxes on this estate if the couple passed away in 2026 as opposed to 2025 (2026 Estate Taxes: $5,200,000 – 2025 Estate Taxes: $2,556,000).
As you can see, the clock is ticking on the ability to take advantage of the increased exclusion amount for estate taxes. Fortunately, there are several strategies that can be employed to offset the consequences of the expiring exclusions.
One effective way to reduce your estate tax burden is simply to exercise generosity by making an “inter vivos” gift. Charity and gifts to others during your lifetime provides the satisfaction of witnessing your money do good in real time.
These gifts provide tax advantages in several ways. Critically, the higher exclusion amount for estate taxes created under the TCJA also applies to taxes on gifts made during one’s lifetime.[7] That is, the $13,610,000 exclusion amount for estate taxes which expires in 2026 can be taken advantage of right now by applying this exclusion, in part, to gifts made in 2025.[8] This allows you not only to make un-taxable gifts, but also to reduce the size of your estate and potentially avoid the consequences of the reduced estate tax exclusions described above.
This exclusion for gift taxes is in addition to the normal annual exclusions for gifts made to individuals. In 2025, the amount excludable amount will be $19,000.[9] Essentially you can make as many gifts as possible to different parties, up to $19,000, and exclude the entire amount of your gifts from your taxable estate.[10]
Whether you are looking to establish a trust for the benefit of some religious or charitable purpose, or you are an individual looking to make a gift to a non-profit, the attorneys at Dalton & Tomich want to ensure that your generous intentions are maximized to the fullest extent possible.
[1] Estate Taxes, Internal Revenue Service, https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax (last updated Oct. 29, 2024).
[2] Id.
[3] What’s New–Estate and Gift Tax, Internal Revenue Service, https://www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax (last updated November 4th, 2024).
[4] Id.
[5] Id.
[6] Get your estate ready for potential gift tax changes. Here’s how, Merrill, https://www.ml.com/articles/estate-gift-tax-exemption-sunset.html#:~:text=The%20lifetime%20gift%2Festate%20tax%20exemption%20is%20projected%20to%20be,smaller%20estate%20for%20your%20heirs (last visited Nov. 14, 2024).
[7] Treasury, IRS: Making large gifts now won’t harm estates after 2025, Internal Revenue Service,
https://www.irs.gov/newsroom/treasury-irs-making-large-gifts-now-wont-harm-estates-after-2025 (last updated Sep. 11, 2024).
[8] Id.
[9] Frequently asked questions on gift taxes, Internal Revenue Service,https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes (last updated Oct. 29, 2024).
[10] Id.
