Reduction in Estate Tax Exemption: Planning for the Change

In the year 2024, the federal estate tax exemption is $13,610,000 per individual. A married couple is thus able to transfer $27,220,000 in total before needing to pay any federal estate tax. This exemption applies to gifts made during life and any assets passing at an individual’s death. In the event that lifetime gifts and deathtime transfers exceed the exemption, then gift tax or estate tax is due on the remaining transfers at a 40% rate.

Under the Tax Cuts and Jobs Act of 2017 this exemption had been doubled, but the higher amount will sunset in 2026. What this means is that in 2026, the exemption will drop in half (potentially to about 7 million dollars).

Couples with Assets Over $13,000,000. Couples with Assets over $13,000,000 should review how this potential law change will impact their estate plan. One technique that many couples will consider is the use of a Spousal Lifetime Access Trust. (SLAT). The idea is that one spouse will use their entire estate tax exemption, before the exemption drops, to establish an irrevocable lifetime trust for the other spouse. The spouse making the gift will have used their full exemption amount, the other spouse will continue to receive all of the income for the rest of their life, and the trust won’t be includable in either spouses estate at their death. The concept behind this SLAT is to have your cake and eat it too. As long as the beneficiary spouse is living, then unofficially and as a practical matter, both spouses will have access to the funds in the event of need. The use of a spousal access trust can backfire if the beneficiary spouse dies soon after the trust is created, for at that death the assets will then be passed on to the children or other beneficiaries. Thus, a SLAT shouldn’t be used unless upon the death of the beneficiary spouse, the remaining assets are sufficient for the use of the surviving individual. (The individual who initially established the trust). This technique could also backfire in the event of a subsequent divorce. Although the number of people who have sufficient assets to consider a spousal lifetime access trust is not large, this will probably be the most popular technique for people trying to preserve their federal estate tax exemption.

Couples with Assets under $13,000,000. Most couples with combined assets under $13,000,000 will likely just wait it out and take no specific action at this time. If the exemption levels are in fact reduced then they should continue to keep an eye on the value of their assets and can consider the use of annual exclusion gifts to help reduce the size of their taxable estate.

There will also be couples who, despite the fact that they could have a taxable estate (with the reduced exemption levels), will still decide to do nothing since they are not ready to make gifts to the children or other beneficiaries at this time, and don’t want to take a chance of losing a portion of the assets in the event of the death of the beneficiary spouse.

Keeping an Eye on the Situation. There will be a great deal of continuing speculation and discussions regarding this potential dramatic decrease in the exemption amount. Congress may or may not choose to extend the current exemption. The results of the November elections could be an important factor in whether or not Congress takes action.

For those interested in using a spousal lifetime access trust, they should begin the planning early. Most planners will closely watch the situation in 2024 and may begin taking action in 2025. Based on our experience with similar potential reductions of estate tax exemption in the past, financial institutions might be flooded with late 2025 requests to establish these trusts. Although the actual transfer of funds would not have to take place for a long time, it does make sense to start the planning process early.