The Tax Cuts and Jobs Act (TCJA) is a significant federal tax law enacted on January 1, 2018, which, among other things, temporarily increased the estate and gift tax exemption for most individuals in the United States. However, this increase is set to expire at the end of 2025. With the expiration of the TCJA approaching, many strategies for transferring wealth to future generations could be significantly impacted when the tax rules revert to pre-2018 levels.
It is important to note that this discussion does not apply to Puerto Rico-born individuals who are Puerto Rico residents at the time of their death, as the regular U.S. federal estate and gift tax rules generally do not apply to them (and who are covered under separate rules thereunder). However, it does impact U.S.-born individuals who are residents of Puerto Rico, as well as Puerto Rico-born individuals who reside in the United States. These groups remain subject to the regular U.S. federal estate and gift tax rules, and the changes under the TCJA will affect their estate planning.
Here’s a summary of some key changes that will take place when the TCJA expires:
- The lifetime gift and estate tax exemption will drop from $10 million (adjusted for inflation at $13.6 million as of 2024) to $5 million in 2026 (which, adjusted for inflation is estimated at $7.2 million for 2026).
- The generation-skipping transfer (GST) exemption will also decrease from $10 million (adjusted for inflation at $13.6 million as of 2024) to $5 million in 2026 (which, adjusted for inflation is estimated at $7.2 million for 2026).
- Portability for the GST exemption will not be available.
Current transfer limits: Lifetime transfers made now, up to the current limit, are exempt from gift taxes (and in some cases, GST taxes). Individuals can transfer up to an aggregate lifetime amount of $13.61 million in 2024, while married couples can transfer up to an aggregate lifetime amount of $27.22 million. Taxpayers who have already reached these limits may still be able to make additional gifts if inflation adjustments are available. Even after the TCJA sunsets in 2025, inflation will continue to adjust these limits upwards. For individuals and families with taxable estates above these thresholds, it’s important to shore up their estate plans and, where possible, take advantage of the current high exemption amount using estate and gifting strategies.
Planning Options to Consider Before 2026
In contemplation of the TCJA exemption, individuals should focus on considering making transfers that qualify as ‘completed gifts’ for federal tax purposes. These transfers are crucial because they remove assets from the donor’s taxable estate, potentially reducing future estate tax liability. ‘Completed gifts’ can be made either through direct gifts to beneficiaries or by transferring assets into a trust. However, to be considered a completed gift, it is essential that the donor does not retain any control or rights over the assets, (such as the ability to change beneficiaries, reclaim the assets, or benefit from the trust in any way). Ensuring that the transfer meets the requirements of a completed gift allows the assets to pass out of the donor’s estate, securing long-term tax benefits under current law.
The above transfers/gifts are just some of the strategies that could help preserve your wealth as we approach the sunset of the TCJA in 2025. It is crucial to start planning now based on your individual situation. Please feel free to contact us to discuss how these changes may impact you and to explore options that fit your needs.
This document has been prepared for information purposes only and is not intended as and should not be relied upon as legal advice. If you have any questions or comments about the matters discussed in this notice, wish to obtain more information related thereto, or about its possible effect(s) on policy or operational matters, please contact us.