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How to Prepare for Upcoming Sunset Changes to Gift and Estate Exemptions – South Florida Business Journal

As published by the South Florida Business Journal

By Kathleen Braica, Florida Office Leader, and
Edward Kim, a Partner in Anchin’s Private Client Group

In 2017, the U.S. Congress passed the Tax Cuts and Jobs Act, which afforded generous provisions on gift and estate tax breaks. The act almost doubled the amount individuals and couples could pass along without incurring taxes. Presently, in 2023, individuals can pass along $12.92 million estate tax-free and couples can pass on double that, or $25.84 million. In addition to the lifetime exclusion, individuals may make annual exclusion gifts of $17,000 per donee (or $34,000 per couple if they elect to gift split).

But come 2026, significant changes are scheduled for current gift and estate tax exemptions that you should plan for now to avoid a huge tax bill later. The aforementioned increases to the tax exemptions are scheduled to sunset, nearly reducing the exemptions by half. That should be around $6 million per person and double for couples, with exact figures adjusted for inflation.

The tax liabilities are substantial if your estate is over the lifetime maximum limits. The IRS would impose a 40% tax on your estate for the amount above the available exemption.

To avoid a heavy tax burden, we have outlined some tips below with the goal of helping you mitigate upcoming liabilities on gift and estate taxes.

Start estate planning now

Anything can happen between now and 2026, including new tax legislation that keeps these generous exemptions in place, but people should still plan with the idea that these provisions will sunset. Waiting too long could potentially result in significant monetary losses, so be proactive.

Trust options

Gifting to trusts for your spouse and descendants before 2026 allows you to use available exemptions now. Keeping the money in a trust helps preserve assets for beneficiaries. First, consult your estate planning advisor to discuss what kinds of trusts best suit your situation.

Trust options include dynasty trusts, SLATs (Spousal Lifetime Access Trusts), irrevocable life insurance trusts, grantor-retained annuity trusts, charitable remainder trusts, qualified personal residence trusts and others.

Schedule plenty of time for setting up a trust

It will take time to put together a trust and refine it, which could vary from a few weeks to months, so avoid waiting until the last minute. Anticipate back and forth between you and your estate planning team, who will be revising and answering your questions during the process. Waiting until the last minute in 2025 to assemble a trust is inviting trouble. A rush job may result in a trust that won’t fully meet your estate needs.

Watch out for pitfalls around irrevocable trusts

Taking full advantage of the available exemption is not always the best course of action if it will threaten crucial access to funds that may be needed in your lifetime.

If you want to max out your exemptions before the 2026 deadline, be careful if you are utilizing an irrevocable trust and you have relatively limited funds.

Let’s use a hypothetical scenario to illustrate this issue. Say you have $16 million, and you decide to max out your estate tax exemptions by putting $12.92 million in an irrevocable trust for your children. That leaves you with a little more than $3 million to live on for the rest of your life. That money could diminish more quickly than anticipated due to unforeseen medical bills, unexpected expenses and drops in the investment market.

You will need a good amount of money outside the trust to make sure you have enough to live on in the future. Be extra mindful of how much should go into the trust and be realistic about your potential future expenses.

Consult with an expert

Navigating the expiration of the gift and estate tax exemptions can be daunting. Consult with experts to make sure you and your family are not stuck with a significant tax liability that could have been avoided, had you taken the time to plan.

Kathleen Braica, Florida office leader, and Edward Kim, a partner in Anchin’s Private Client group, serve high-net-worth individuals and families, funds and private companies with an array of tax, accounting and advisory services.