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This blog is a summary of the key points from our recent webinar. To view the recording of the webinar, please visit here.
“What exactly is happening with the proposed estate law tax changes in Washington?” The question has been on a lot of our minds lately. Some people believe business will continue as usual, while others believe that the sky is falling.
A common misconception surrounding new presidential administrations is the fear that tax laws will change overnight. In truth, changes to tax laws often occur only after significant negotiations and compromises take place in Congress.
However—due to the sunset provision in the 2012 Tax Cuts and Jobs Act —the federal estate tax exemption is set to dramatically decrease in 2026 to most likely somewhere between $6.5 to $7 million per individual from the current $11.7 million, even if no new tax laws are passed before then. Accordingly, the best thing to do right now is to stay informed and prepare.
1. Know Your Documents
The first thing to do is thoroughly review each document related to your estate. This includes wills, revocable trusts, beneficiary designations, and your financial and medical powers of attorney. These are the key documents that will impact your life and more importantly the lives of your family if something happens to you. If you do not have these documents, you should speak to an estate planning attorney.
These documents were designed to be flexible. If a document was drafted during a time in which the estate tax laws were different, you may need to speak with an estate planning attorney about how they should be revised. Wills do not need to be changed every six months or even every year, but if you set them and forget them, you may be in for some surprises 10 or 15 years later. Even a few years later can make a huge difference.
For business owners, look at your entity documents. There may be structures in your documents that do not consider current tax issues or the current structure of your business, which is particularly important for older buy-sell agreements.
2. Revisit Your Charitable Donation Plans
Several options exist for those who are looking to leave portions of their estate to charitable organizations. Some of these options may be used to counter a potential decrease in the federal tax exemption.
A charitable trust, whether that be a lead trust or a remainder trust, can be structured in a way to assist with estate tax issues and may even allow you to receive income tax benefits as well.
Donor-Advised funds are also a popular alternative to private family foundations, for those who would rather avoid the complications of a private foundation such as the annual filings with the IRS. The fund can provide you with an income tax deduction and reduce your taxable estate by the amount you would like to donate, all while maintaining significant control over your charitable choices.
3. Annual Exclusion Gifts
In the United States, each citizen is granted the right to give any other individual $15,000 a year with no impact to the Donor’s estate tax exemption. This is called the annual gift exclusion. For married couples, the annual gift exclusion amount is $30,000 per recipient.
If you are inclined to give money to your family and you have a potentially taxable estate, you are leaving money on the table if you do not come up with a strategy to give away these amounts to your family every year. In 10 years, you can move a fair amount of money to your beneficiaries, free of any estate tax implications.
4. Leverage Your Insurance
In the past, when the exemptions were much lower, life insurance was seen as a way to provide cash and liquidity to pay estate taxes. To provide maximum efficiency, the insurance policy would be owned by an irrevocable life insurance trust, so that the proceeds were not includable as part of your taxable estate.
As estate tax exemptions increased, the popularity of life insurance trusts has decreased as fewer and fewer people have needed to worry about estate taxes. But now may be the time to revisit these strategies.
Due to possible changes to the law, you may want to consider transferring an existing policy to an irrevocable life insurance trust to remove the death proceeds from your taxable estate.
Bear in mind, you do have to survive for three years after the transfer for the policy to be excluded from your taxable estate. If the exemption is reduced, and you own a policy in your name, you may want to transfer it sooner rather than later.
5. Utilize “Freeze” Techniques
Freeze techniques are used to prevent the growth of an estate to reduce or eliminate the federal or state estate tax. One way to accomplish this is to move assets to trusts for your beneficiaries in a way that minimizes gift tax.
In short, those at risk for the estate tax can transfer valuable assets into various trusts for their beneficiaries, while limiting the value of the assets’ growth in their own estate. Assets will continue to grow, but outside of your taxable estate, while your estate remains essentially “frozen” in its current state.
We will not pretend to know what the future may hold for estate tax law exemptions. The important thing to remember is that as of now, time is on your side. The sooner you act, the more benefits you and your family will obtain.
If you have questions about the best strategies for your estate and trusts, please contact us at (443) 589-5600. At Sessa & Dorsey, we consider the bigger picture at hand and advise our clients on the best estate planning tools for their specific needs and desires.
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