It's a big year for estate taxes, requiring a total review of all estate plans! Time to set the stage with your clients for a dramatic shift in strategies!
Estate taxes have long been a key challenge for individuals who wish to pass their assets to the next generation. The more significant the assets, the larger the issue. Size matters. Historically, life insurance policies have been an important financial instrument to help pay these taxes, preserving and protecting family assets, businesses, farms, and other sources of family wealth. Life insurance is uniquely suited for this purpose. That's why the role of the financial professional is so critical. Accordingly, you perform a unique role in motivating and helping a client to reach their goals. Your knowledge of the current tax issues is critical to working with the client's accountant and attorney as a valued team member. Most importantly, the life insurance professional often drives the dialogue and creates action.
As we move into a new era of tax policy, potential changes to the estate tax laws are on the horizon. These changes could have substantial implications for wealth transfer strategies, making it crucial for individuals and families to stay informed and proactive. In this blog, we’ll explore the potential upcoming estate tax changes and what they could mean for your financial planning.
As of 2024, the federal estate tax exemption is $13.61 million for individuals and $27.22 million for married couples, thanks to the Tax Cuts and Jobs Act (TCJA) passed in 2017. This historically high exemption has meant that only a small percentage of estates have been subject to the federal estate tax. Parenthetically, transfers to heirs, as gifts or at death, in excess of these amounts are subject to a 40% transfer tax—clearly a significant burden. This will likely change in the next year or so, with significant implications for estate planning.
Several proposals and discussions in Washington suggest that the estate tax landscape will soon change. Here are some key potential changes to be aware of:
If no action is taken, the exemption will revert to its pre-TCJA level of $5.6 million per individual---resulting in a significant increase in estate taxes over the current 2024 level!
Independent of the sunsetting provision, one of the most significant changes being discussed is reducing the federal estate tax exemption. Some proposals suggest lowering the exemption to around $6-7 million per individual or $12-14 million for married couples. This change would subject many more estates to the estate tax, dramatically increasing the need for strategic estate planning.
Another proposed change is an increase in the estate tax rate. Currently, the federal estate tax rate is 40% on amounts above the exemption. Proposals have suggested raising this rate, increasing the tax burden on estates that exceed the new lower exemption.
In addition to changes to the estate tax, there are also potential changes to the gift tax and the generation-skipping transfer (GST) tax. The gift tax exemption, currently unified with the estate tax exemption, could also be lowered, limiting the ability to transfer wealth tax-free during one's lifetime. The GST tax, which applies to transfers made to grandchildren and other younger generations, could see similar changes.
The potential changes to estate taxes underscore the importance of reviewing and updating your estate plan. Here are a few strategies to consider in light of these possible changes:
If the estate tax exemption is reduced, now may be the time for clients to make larger gifts or transfers to take advantage of the higher exemption while it lasts. By transferring assets out of the estate now, clients can potentially reduce the amount that will be subject to estate tax later.
Trusts, such as irrevocable life insurance trusts (ILITs) or grantor-retained annuity trusts (GRATs), can effectively minimize estate taxes. These structures can help manage the transfer of assets tax-efficiently, potentially preserving more wealth for your client's heirs.
Given the uncertainty around future estate tax laws, it's wise to review your client’s estate plans regularly and work with their accountants or estate planning attorneys to ensure that their strategy remains aligned with their goals and the evolving tax landscape.
Review of life insurance portfolio options to "future proof" in light of probable future needs. Ironically, current inflation has the additional potential to "inflate" significant assets, creating a double whammy—future taxes will be higher, and the future estate value exposed to taxes may increase. For older individuals, term conversion options and insurance rates can be impacted by a year or two delay in exercising options. It's never a bad time to consider options and alternatives.
While it's unclear exactly when or how these changes will be implemented, staying informed and prepared is key. Lawmakers are still debating the specifics, and any changes will likely go through a lengthy legislative process. However, taking proactive steps now can help mitigate potential tax burdens and ensure that your client's estate plan is robust and adaptable.
For financial professionals, upcoming estate tax changes could profoundly impact clients' wealth transfer strategies and estate planning. The uncertainty is creating an important opportunity for dialogue with clients and their advisors. It is not too soon to initiate these discussions. Stay tuned for future ideas and approaches to this emerging challenge.