Estate Planning for 2024 and 2025: Seize Opportunities Before the Tax Sunset

At Mission Wealth, we’ve been closely monitoring the upcoming changes in the tax code that could significantly impact our clients. In 2017, Congress passed the Tax Cuts and Jobs Act, ushering in sweeping changes across the federal tax landscape. One of the notable changes was the lifetime unified credit exemption, which affects estate and gift taxes. This exemption represents the total amount of money you can leave to anyone during your lifetime or at death without incurring estate or gift taxes.

The Act doubled this exemption amount from $5.49 million per person in 2017 to $11.18 million in 2018, and it has continued to increase with inflation, reaching $13.61 million for 2024. This substantial increase has profoundly altered the estate planning landscape for individuals dealing with federal estate taxes.

Who Owes Estate Taxes?

Before delving into the impact of these tax law changes, it’s essential to understand what the federal estate tax, often referred to as the “death tax,” entails. Every individual has their own lifetime unified credit exemption (referred to as exemption from here on out), allowing them to pass a specified amount tax-free to anyone during their lifetime or at death. There are some exceptions, such as the unlimited marital deduction, which allows married couples to transfer assets to each other without using their exemption. Additionally, there’s an annual gift exclusion, which allows individuals to give a set amount to as many people as they wish without affecting their exemption. For 2024, the annual exclusion is $18,000. Married couples can also combine their exemption through a process of electing portability on their estate tax return, allowing the surviving spouse to potentially double their exemption.

The estate tax rate itself varies depending on the taxable estate’s value, starting at 18% and reaching 40% for amounts exceeding $1 million.

Here’s a breakdown of the federal estate tax brackets:

Now, let’s illustrate these concepts with a practical example. Consider a married couple – Mike and Carol – who have a total net worth of $30,000,000.  Mike passes away in early 2024, leaving everything to his wife Carol.  Because of the unlimited marital deduction, Mike does not use any of his exemption.  Carol timely files an Estate Tax Return (Form 706) showing no tax due and elects portability, increasing her exemption to $27.22 million. Carol unfortunately passes away at the end of 2024 and leaves all her assets to their 6 children – Greg, Peter, Bobby, Marcia, Jan, and Cindy. Remember that Carol has $30,000,000 of assets at this time, meaning her taxable estate exceeds her exemption by $2,780,000 and she will owe estate taxes to the tune of $1,057,800.

Most taxpayers will not find themselves in this situation, however. According to the latest data available from the IRS, in 2021, only 2,584 estate tax returns were filed that owed taxes. This means that only 0.08% of adult deaths in the United States resulted in a taxable estate. The historical trend indicates a decline in taxable estates, with only 1% of adult deaths having taxable estates before 2004, except for 2010 when the estate tax was temporarily abolished.

The Sunset Looms

The Tax Cuts and Jobs Act was passed using a budget reconciliation method, requiring its provisions to expire within 10 years of passage. On December 31, 2025, at midnight, the tax code’s updated provisions will expire, drastically altering the tax landscape. The exemption will be halved, we estimate it to be around $7 to $7.5 million per person, and the estate tax rate will increase to 45%.

Consider another scenario with Al and Peggy, a couple with a net worth of $15 million in 2024. If both Al and Peggy were to pass away in 2024, they wouldn’t face any estate tax issues due to their combined exemptions of $27.22 million, well above their estate value. However, if they outlive the tax law sunset, their exemptions will drop to $7 million each. If they both pass away at the end of 2026, their combined exemption would be $14 million, resulting in estate taxes of $450,000 due to the change in tax laws (assuming a flat 45% estate tax rate).

2024 and 2025 Estate Planning Opportunities

Most households will continue to not have an estate tax issue after the sunset – $7 million in exemption instead of $13.61 million is a significant decrease, but looking at historical trends, will still impact less than 1% of households per year.

However, for high-net-worth individuals 2024 and 2025 present estate planning opportunities to leverage the expanded exemption before the window closes. The IRS has indicated no penalties for individuals using their expanded exemption before sunset, making it a “use it or lose it” situation. By making strategic moves like gifting assets or establishing specific trusts, individuals can shield significant assets from future estate taxes. For individuals with the liquidity to do so, taking advantage of the expanded exemption today could save almost $3 million in future estate taxes (the difference between the 2024 exemption and the projected post-sunset exemption of $7 million times 45% estate tax rate).

For other individuals who are on a rapid increase in their net worth – maybe through their own business, making good investments, or high-income earners – look at your financial outlook now and run scenario analysis to see if some certain estate plan moves make sense to begin implementing.

At Mission Wealth, we advocate proactive planning, including estate planning, to help our clients reduce potential future estate tax burdens and support their financial goals. Discuss your estate plan outlook with your wealth advisor today to explore tailored solutions that align with your specific needs and aspirations or contact us today to get started.