Sunsetting of the Tax Cuts and Jobs Act on December 31, 2025

… and the Need for Estate Planning Now

By Joseph Parmegiani, JD, CPA, Partner and Claire Snow, CPA, CFE, Supervisor

The Tax Cuts and Jobs Act (TCJA) of 2017 is set to expire on December 31, 2025, unless Congress acts to extend it or make it permanent. If no action is taken, the federal estate, Generation Skipping Transfer Tax (GSTT) and gift tax exemption amount will revert to its pre-TCJA level of $5 million per individual, adjusted for inflation.

Most projections indicate that the lifetime exclusion amount – adjusted for inflation – will be between $6.5 million to $7.5 million per individual at the start of the 2026 tax year ($13 million to $15 million per married couple). The lowering of the exemption amount will result in a significant increase in the number of estates subject to federal estate tax and a higher estate tax liability for estates already subject to the estate tax. At a 40 percent tax rate, the impact could easily run into the millions for taxpayers who don’t take advantage of the higher exemption before it expires.

Time Is of the Essence

Since proper estate planning can take time to execute, now is the time to formulate your strategy. Delaying could risk losing the opportunity to shelter assets from United States estate and gift taxes. This is particularly true if entities/vehicles need to be formed, assets need to be liquidated and vehicles funded to accomplish your estate tax planning goals.

Potential Benefits and Drawbacks

Below are several estate and gift planning ideas to consider. Careful consideration of every individual’s situation is needed to understand the benefits and drawbacks.

• Dynasty Trust is an irrevocable trust designed to transfer wealth across multiple generations while minimizing estate and gift taxes. By applying gift tax and GSTT exemption to the transfer of assets into the trust, the value of those assets and any post-gift appreciation would be sheltered from federal estate taxes upon death and made exempt from the GSTT. The trust property could be administered for the benefit of the beneficiaries for generations to come.
  
  
• Grantor Retained Annuity Trust (GRAT) allows the grantor/donor to transfer assets to a trust while retaining an annuity interest for a set term. The remainder interest passes to beneficiaries at a reduced gift tax cost. This technique is effective with assets that are appreciating faster than the current interest rate, allowing significant wealth transfer with minimal tax impact by having the grantor keep the corpus of the gift while potentially making a tax-free gift of the appreciation of the assets in the future.
  
  
• Spousal Lifetime Access Trust (SLAT) is an irrevocable trust which enables one spouse to gift to a trust that can benefit the other spouse even while the spouse who made the gift is still alive. Gifting assets to a SLAT removes those assets from a couple’s combined estate. One key advantage of a SLAT, in addition to reducing an estate’s assets, is that it allows the non-donor spouse to request distributions of income or principal to maintain the couple’s normal standard of living. Usually while the donor spouse is living, he or she is responsible for any tax on the income the trust earns which allows the assets inside the trust to grow without being reduced by income taxes.
  
  
• Irrevocable Life Insurance Trust (ILIT) allows the owner of a life insurance policy to transfer the policy into the trust so that the policy death benefit is not included in their estate. At the same time, the ILIT gives the owner of the policy the ability to direct how and when the death benefit is used and for whom. The ILIT enables the owner to leverage the annual gift tax exclusion (currently $18,000 in 2024) by using those gifts to pay the premiums on the life insurance in the trust. Many of these trusts rely on annual gifting to cover life insurance premiums. It may be prudent to make a large gift of cash or securities now while the exemption is higher to avoid paying gift taxes on these cash infusions to cover the future premium costs. Not doing so could lead to a situation where either gift or estate taxes at a rate of 40 percent are incurred, or the trust is not fully covered against the GSTT.

As one can surmise, these techniques are complex and require careful consideration not only for tax issues, but also to meet the personal wealth transfer objectives of the taxpayer. Emotions run high during this process and so sufficient time is the planner’s best friend.

Contact Us

At PKF O’Connor Davies, we have a strong, dedicated team for tax and accounting issues related to trust and estate tax compliance matters. We welcome the opportunity to answer any questions you may have related to this topic or any other accounting, tax or advisory matters relative to trust and estate planning. Contact your client service team or:

Joseph Parmegiani, JD, CPA
Partner
jparmegiani@pkfod.com | 908.967.6876

Claire Snow, CPA, CFE
Supervisor
csnow@pkfod.com | 908.520.6344