Estate Planning Opportunities: Navigating the Tax Cuts and Jobs Act Sunset

When it comes to taxes, planning ahead is essential. With the sunsetting of the Tax Cuts and Jobs Act (TCJA) on the horizon, navigating the ever-changing tax landscape is crucial for effective estate planning. The key provisions of the TCJA are set to expire on Jan. 1, 2026, making it important to capitalize on existing tax benefits through strategic planning and informed decision-making.

The TCJA reshaped the tax code, significantly altering the estate planning landscape. Under the TCJA, the unified lifetime estate and gift tax exemption amount increased to $10 million per person, adjusted annually for inflation. As of May 2024, this exemption is $13.61 million per individual (or $27.22 million per married couple). However, this increase is temporary. The TCJA’s “sunset” provision is scheduled to expire on Jan. 1, 2026, reducing the exemption to the pre-TJCA amount of $5 million, also adjusted for inflation.

SOURCE: Preparing for the TCJA Sunset in 2026 | Charles Schwab

Estate planning opportunities before the sunset

Estate planning is a fundamental pillar of financial management, ensuring the orderly transfer of assets and the preservation of wealth for future generations. Several strategies stand out as valuable tools in today’s dynamic environment, each offering distinct advantages.

The following methods offer a spectrum of benefits, including asset protection, tax minimization and the ability to maintain flexibility and control over one’s assets:

Defective Grantor Trusts (DGTs) are irrevocable trusts intentionally structured to be “defective” for income tax purposes. Because the grantor retains certain powers over the trust, any trust income is taxable to the grantor (rather than the trust or the beneficiaries). However, assets transferred to the trust are deemed to have been moved out of the grantor’s taxable estate and thus will not be subject to estate tax at the grantor’s death. Since the grantor pays all income taxes earned by the DGT, the trust assets can continue to grow “tax-free” outside the estate. Additionally, by using their personal funds to pay income taxes on behalf of the trust, the grantor can continue to reduce the value of their estate over time.

Family Limited Partnerships (FLPs) enable individuals to transfer wealth to their loved ones without relinquishing centralized management of family funds. The general partner controls and manages the partnership, while the limited partners’ pooled assets allow them to capitalize on economies of scale. After contributing assets to a limited partnership, individuals can transfer partnership interests to their friends or family members, typically by gifting or selling the interest to such DGTs set up for their intended beneficiaries. Due to the limited partners’ lack of control (and often, a lack of marketability resulting from transfer restrictions), it may be appropriate to discount the value of the transferred limited partner interest(s) as well.

Spousal Lifetime Access Trust (SLAT) is an irrevocable trust created by an individual to benefit their spouse. During the beneficiary spouses lifetime, they may receive trust distributions for health, education, maintenance or support. After the beneficiary spouse’s death, the trust assets pass to the heirs (usually the children and grandchildren) free of estate tax. The SLAT structure may appeal to a married client interested in wealth transfer, as the client can use their increased lifetime exemption while ensuring their spouse will continue to have adequate access to assets after the client passes away. However, the SLAT must be administered carefully; if the IRS determines that the grantor spouse has benefitted from the SLAT in any way, all the trust assets could be brought back into the grantor’s estate.

While these methods are sophisticated strategies for asset protection and tax minimization, if you are just starting out on your estate planning journey, our Estate Planning 101: Back to Basics article covers the important documents you will need for an estate plan.

Alternative gifting avenues that preserve the Lifetime Exemption amount

Further opportunities exist within estate planning that do not diminish the lifetime exemption amount. These exceptions include:

1. Annual exclusion per person: $18,000 ($36,000 per couple).
2. Tuition payments: Payments made directly to educational institutions for qualifying education costs are not subject to transfer tax.
3. Medical expenses: Payments made directly to medical providers for qualifying medical expenses are not subject to transfer tax.
4. Charitable contributions: Payments to qualifying charities.

The TCJA of 2017 introduced a shifting landscape for estate planning. Through strategic planning and decision-making, individuals can capitalize on existing tax benefits before the sunsetting provisions of the TCJA take effect. In light of the upcoming election cycle, it’s also wise to stay updated on potential last-minute changes to the law as you explore your options. To navigate these tax changes effectively and achieve your tax planning and estate planning objectives, contact your wealth manager or estate planning attorney to discuss your specific circumstances and how to best attain your desired estate planning goals.