Even if a client thought they would not be subject to estate or gift tax once the Tax Cuts and Jobs Act of 2017 (TCJA) was enacted, you may want to re-examine the value of their assets to determine whether they exceed a lower exemption amount. In 2026, the TCJA’s larger exemption will be reduced from $13,610,000 in 2024 to an amount estimated to be between $6 and $7 million per person ($5 million per person in 2011, adjusted for inflation). With potential stock market gains and property value appreciation, some of your clients could have a taxable estate in the next few years. When figuring their total estate value, don’t forget to include the death benefit on life insurance policies they own or that their employer provides, as well as any other employer-provided death benefits.1. Determine your clients’ net worth
Many states have much lower estate tax exemptions than the federal exemption, so if a client lives in a state with an estate or inheritance tax, it could be worthwhile to plan for it.
Ultra-high net worth families who can afford to make large gifts may consider using their entire exemption for gifts in 2024. While gifts up to the $13,610,000 limit should not be brought back into an estate if the exemption is reduced in the future, any exemption amount between today’s exemption and a future, lower exemption could be lost if it’s not used. Depending on the situation, outright gifts may be beneficial, or more advanced techniques could be appropriate. Many common trusts, including irrevocable life insurance trusts (ILITs) and grantor retained annuity trusts (GRATs), may be grantor trusts. Grantor trusts are designed to be included in a client’s income for income tax purposes, but remain outside of their taxable estate. Because interest rates have significantly increased, charitable remainder trusts (CRTs), which provide for an income stream and charitable deduction, are more attractive than they have been in prior years. In a higher interest rate environment, a client may also consider a qualified personal residence trust (QPRT), which allows them to give away a future interest in their principal or vacation home at a reduced gift tax value. GRATs, installment sales to grantor trusts and charitable lead trusts are less beneficial in high interest rate environments.2. Ramp up gifting
It may make sense for you and a client to talk to an estate planning attorney to determine whether any of these sophisticated estate planning techniques should be part of your client’s overall plan.
Using an irrevocable life insurance trust to provide an income tax-free death benefit outside of the taxable estate is a common estate planning technique. To take advantage of the increased exemption amount, making large gifts today could make sense. Even if premiums are due over several years in the future, a client could make a large gift to an ILIT today to provide a reserve account that the trustee may use to pay upcoming premiums without additional gifts. It could also be advantageous to make current gifts to other types of trusts that are part of a client’s overall legacy plan. Now may be a good time to give assets that have declined in value to family members or a trust. A lower valuation will decrease the gift tax value, and all of the future growth will be outside of your client’s taxable estate. The client could also consider an intrafamily sale to take advantage of reduced valuations and potentially move more appreciation outside of their estate.3. Prefund trusts
If a client is a trustee or beneficiary of a current trust, such as a credit shelter trust of a deceased loved one, keep income taxes in mind. In 2024, trust income of $15,201 or more is taxed at the highest tax rate of 37%. Nongrantor trusts get a tax deduction for income distributed to beneficiaries, so income can be managed by optimizing the amount of income that is retained in the trust and that which is distributed to beneficiaries.4. Manage trust income
Regardless of whether a client needs to worry about estate taxes or gifting to trusts, they’ll want to make sure their wealth will pass to their loved ones as intended. Life insurance proceeds and retirement plan funds often account for a high percentage of net worth, and they don’t pass under a will, so make sure your clients’ beneficiary designations are current on those accounts.5. Review beneficiary designations
If your client hasn’t prepared a will or living trust, suggest they contact an estate planning attorney and start the process.
There are many ways to keep planning flexible as laws change. Estate planning attorneys can draft documents to stay flexible through the years by including spousal access, trust protectors, special powers of appointment, grantor trust toggles, merger provisions and other appropriate flexibility-enhancing items. In some cases, flexibility can be increased by decanting an older trust into a new trust with these features.6. Keep the plan flexible
