13 Nov Advanced Planning Topic: Year-End Tax Update
Both the Federal Estate Tax Exemption and Annual Exclusion will increase on January 1, 2025.
*The Federal Estate Tax Exemption is the amount an individual can pass free of the Federal Estate Tax. Assets in excess of the Federal Estate Tax Exemption are taxed at a 40% rate.
Planning Point: For those who have used all their Lifetime Federal Estate Tax Exemption through 2024, consider making additional gifts of $380,000 (or $760,000 for married couples) beginning on January 1, 2025.
**The Annual Exclusion refers to gifts that can be made during each calendar year, which do not reduce a person’s Lifetime Federal Estate Tax Exemption
Planning Point: If you regularly make Annual Exclusion gifts, you may make increased gifts of $19,000 (or $38,000 for married couples) beginning on January 1, 2025. For those who have not made their annual exclusion gifts this year, they have until December 31st of this year to make their 2024 gifts and then they can make their 2025 gifts beginning January 1, 2025. For example, a married couple could give $36,000 to their daughter on December 31, 2024, and $38,000 to her the very next day on January 1, 2025. That’s $74,000 in two days, which is not subject to the Federal Estate Tax and does not reduce the giver’s Lifetime Exemption.
January 1, 2026 Sunset (SLATs and Life Insurance)
Although the Federal Estate Tax Exemption has been increasing, it is scheduled to decrease to $5,000,000 at the end of 2025. With an inflation adjustment, it’s anticipated that the new Exemption amount will likely end up being about $7,000,000. The problem is that a $6,990,000 decrease in Exemption (from the current $13,990,000) would cause an additional estate tax of $3,145,500 for individuals with a taxable estate of at least $13,990,000 (or $6,291,000 for married couples with a taxable estate of $27,980,000).
Planning Point #1: Consider using your current Exemption while you still have it. Gifts to Trusts for children is one approach. Another, for an individual who is married, is to make gifts for his or her spouse in a manner where he or she maintains access to the gifted assets while the spouse is living – a technique known as the Spousal Limited Access Trust (i.e. a “SLAT”). The IRS has said that it will not “claw back” such gifts.
Planning Point #2: For clients not yet comfortable (or interested in) gifting, we have helped them utilize life insurance strategies to reduce the impact of the Federal Estate Tax. For example, 2nd to die life insurance owned by an irrevocable trust is very effective as a hedge against some, or all, of a client’s exposure to Federal Estate Taxes. Because the policy death benefit does not pay out until the death of the surviving spouse, such policies are often much more affordable than policies insuring a single life. Additionally, we’ve helped clients fund premiums on such policies with interest earned from existing investments and from Required Minimum Distributions from Retirement Accounts (RMDs) that are not needed by clients to maintain their lifestyle (i.e. – their legacy assets).
Planning Point #3: Many clients have used a combination of SLATs and life insurance to address their exposure to estate taxes. Therefore, if you have SLATs but not insurance to protect against the death of one of the spouses (particularly shortly after the SLATs are funded), we recommend a discussion about how life insurance can enhance your SLAT planning (both from and income replacement standpoint and to offset income taxes).
Kathmere Capital Management (Kathmere) is an investment adviser registered under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply any level of skill or training. The firm only transacts business in states where it is properly registered or is excluded from registration requirements. The information presented in the material is general in nature and is not designed to address your investment objectives, financial situation or particular needs. Prior to making any decision, you should assess or seek advice from a professional regarding whether any particular transaction is relevant or appropriate to your individual circumstances. The opinions expressed herein are those of Kathmere and may not actually come to pass. This information is current as of the date of this presentation and is subject to change at any time, based on market and other conditions. This material is for general information only and is not intended to provide specific advice or recommendations for any individual.
The charts, summaries, and observations are for purposes of illustration only. The information contained herein is not tax or legal advice. Any anticipated or assumed benefit related to the outlined strategy, whether financial or otherwise, is not guaranteed. Any strategies outlined or described should not be implemented without you first discussing with an appropriate professional, including your personal attorney, CPA, or tax professional. The strategies should only be implemented through legal documents prepared by your attorney. The information and assumptions contained in the illustrations is general.
Alan Wandalowski, JD, LLM, is not licensed as an investment adviser representative and does not provide advice related to securities. Advisory services are offered by licensed representatives of Kathmere. Neither Mr. Wandalowski nor Kathmere is engaged in the practice of law or accounting.