Planners need to be prepared for a shifting landscape in the coming year when it comes to the estate exemption.
The estate tax exemption increased by almost $1 million for 2023 as a result of recent IRS annual inflation adjustments. The Tax Cuts and Jobs Act (TCJA) of 2017 had already doubled the exemption for gifts between 2018 and 2025.
But the TCJA cuts in the exemption will expire in 2026 unless Congress passes legislation to extend the law. Given the division of powers in Congress in the next term, the prospects of such legislation becoming a reality are uncertain.
That means advisors need to plan carefully.
The estate tax exemption increasing to $12.92 million in 2023 means that “married couples can exempt up to $25.84 million without having to pay federal estate or gift taxes,” said Michael Levy, partner in Crowe Tax Services in New York. He added that even if federal estate taxes are exempt, each state has its own rules.
For instance, “here in Washington State, we have a lower exemption amount of $2.193 million per person, with rates ranging from 10% to 20% on taxable estates. Washington, however, does not have a gift tax,” said Matthew Goodwin, a CPA and leader of Family Wealth Services at CBIZ Berntson Porter in Seattle. “This also highlights the importance that residency plays in estate planning.”
Levy said the increase in the exemption amount allows for high-net-worth clients to shield more of their wealth from the estate federal tax of 40%, which has remained the same. “It is extremely important to think about it now, since the rules sunset Dec. 31, 2025, and revert to the previous exemption amount plus inflation of approximately $5 million to $6 million,” he said.
The annual exclusion for gifts is also increasing, from $16,000 to $17,000. “We have several clients that have more cash coming in than they can spend in a given year, so we’re suggesting they consider gifting more aggressively to reduce their taxable estate and help [recipients] while alive,” said Bruce Primeau, a CPA and president of Summit Wealth Advocates in Prior Lake, Minn.
“This may not sound like a significant amount to move outside of one’s taxable estate, but if you have a child or grandchild and pre-fund his or her 529 account for five years, you have just removed $85,000 (and future growth) from your estate,” said Abbey Flaum, managing director and family wealth strategist at Homrich Berg in Atlanta.
“Some believe that current, aggressive gift planning is only necessary if the gift will be ... something more than the $6.8 million projected exemption for 2026, but this may not be true,” Flaum said. “If I put $1 into a trust today and that $1 grows to $5 at the time of my death, I didn’t just avoid the 40 cents of tax on the gifted dollar, I avoided $2 of tax on the $5 value to which my initial gift grew.”