The 2017 Tax Cuts and Jobs Act (TCJA) nearly doubled the lifetime estate and gift tax exemption from $5.6 million for individuals and $11.18 million for couples, to $11.18 million for individuals and $22.36 million for couples, indexed for inflation after 2018. For 2023, the exemption stands at $12.92 million per person and $25.84 million for a married couple.
Families who are interested in passing on wealth should keep in mind that the lifetime estate and gift tax provisions in the TCJA are scheduled to sunset, or expire, at the end of 2025, says Sander Bleustein, an advanced planner at Fidelity. "If nothing changes between now and then, at the end of 2025 they will revert back to 2017 levels," Bleustein explains. Estate tax-wise, if TCJA sunsets as planned, the estate and gift exemption might decline to something like $7 million per individual and $14 million for a married couple, depending on inflation over the next few years.
While it's possible that there may be new tax legislation between now and 2026, families should be reviewing their estate plan with the understanding that the TCJA provisions could expire, says Bleustein. "Many families who decide to wait and see what happens may wind up losing the ability to save on estate taxes," he predicts. "Rather than wait until the law actually sunsets, have a conversation with your attorney or financial professional and, if necessary, take action now."
Rebuilding the shelter
A credit shelter trust (CST), also known as a bypass or family trust, has long been a popular method of maximizing the federal estate tax exemptions for a married couple. When one spouse passes away, a portion of their assets is placed into a trust which passes to their beneficiaries on the death of the surviving spouse. The assets in the trust, and any appreciation of those assets, is "sheltered" from estate taxes at the death of the second spouse.
When the law changed at the end of 2017, many families who no longer expected their wealth to exceed the higher estate tax exemption thresholds opted to forgo a credit shelter trust, says Bleustein. One reason is that there are some potential downsides to a CST, including potential additional taxes for the beneficiary. "Assets that go into a CST only receive a single step-up in cost basis upon the first spouse's passing," explains Bleustein. "On the other hand, if the first spouse to die leaves all of their assets to the surviving spouse, the cost basis on those assets is stepped up a second time upon the death of the second spouse." One alternative to automatically funding the CST is to allow the surviving spouse to disclaim the assets to a credit shelter trust, also referred to as a disclaimer trust.
However, there are risks to relying on a disclaimer, notes Bleustein, including a 9-month window after the death of the spouse to make the disclaimer and the possibility that the surviving spouse may not want to give up control of the assets. "A lot of times the disclaimer simply isn't exercised, and then there's an estate tax that could have been avoided," he says. Given that, he suggests, families who may have assets above the exclusion when the law sunsets should consider discussing the potential advantages of a credit shelter trust with a tax attorney or financial professional.
Planning for growth
Your estate plan should also factor in the potential appreciation of your assets between now and 2026, notes Bleustein. A couple with a net worth of $12 million today might feel comfortable forgoing a trust strategy now, but assuming a 6% growth rate, for example, their assets could exceed the potential $14 million threshold in 2026. "If you take advantage of transferring or gifting assets (and their future appreciation) now, you're using an exemption you might otherwise lose when the TCJA sunsets," Bleustein explains.
There are several different ways in which a couple can tax efficiently transfer assets while still accomplishing their financial and wealth transfer goals. The simplest strategy is to leverage their annual gift tax exclusion, which for 2023 will be $17,000 per individual. Another strategy is to transfer a portion of their lifetime estate and gift tax exemption, which for 2023 will be $12.92 million, into an irrevocable trust for the benefit of their intended heirs. Finally, another strategy to reduce estate taxes can include leaving assets to charity at death, which can reduce your taxable estate while leaving a charitable legacy. You can use the Fidelity Charitable(R) Giving Account(R) to make lifetime charitable gifts and charitable bequests upon your passing, which can also be left to your heirs for them to use for their lifetime charitable giving.
Other reasons to revisit your plan
Even if you're confident that the TCJA sunset won't affect your strategy, it's still important to revisit your estate plan periodically. Your children may be coming of age or finding their own financial circumstances changed, while life events such as marriage, divorce, or the birth of a child can trigger the need to change your will or the terms of your trust. You may also want to consider whether your trustees or executors are still the best choice to help accomplish your estate planning goals.
By having regular conversations with your financial professional and attorney, you can adapt your plans to changes in tax laws or your family's personal situation—while working to safeguard your goals for your legacy.