How Do Recent Changes in Tax Law Impact Strategies for Estate Tax Reduction?

What Are Some of the Recent Changes in Tax Law That Affect Estate Planning?

It’s easy to think of tax law as a centuries-old tradition where change is glacially slow. There’s some truth to that, but it’s also true that there have been changes in laws recently that affect estate planning, especially for high-net-worth individuals who are interested in paying as little estate tax as possible. While California itself doesn’t have estate taxes, the federal government has several that can become costly, especially as the laws change over the next year or two. Currently, the federal estate tax starts with estates valued at $13.61 million or higher (for 2024) for individuals or twice that for married couples. 

In the fall of 2023, the IRS announced a program to target high-income earners who are thought not to be compliant in filing and paying taxes. That means scrutiny is increasing for those with high incomes. This comes at a time when the 2017 Tax Cuts and Jobs Act, which doubled the federal estate tax exemption, is set to expire at the end of 2025. Congress could vote to extend the Tax Cuts and Jobs Act, but it’s not clear if they will. If they don’t, the threshold for estate taxes will drop from the minimum $13.61 million or higher listed above and could become as low as $5-6 million per person.  

So it’s worth considering taking specific actions before the Tax Cuts and Jobs Act expires in 2025, if it does.

Consider Creating a Spousal Lifetime Access Trust

A Spousal Lifetime Access Trust (SLAT) is an estate planning tool known as an irrevocable trust. That means assets are placed into the trust’s ownership and can’t be changed once the trust is finalized. The trust is set up to benefit the spouse of the person who set up the trust, who can benefit from the trust even while the original asset owner is still alive. Currently, the amount that can be placed into a SLAT without incurring a gift tax is $13.61 million. The other benefit of a SLAT is that the money placed there reduces the remainder of the couple’s estate, potentially lowering estate taxes on the assets outside the trust. 

Gifts for Children

Another way to potentially bypass steep estate taxes is to transfer assets as gifts to your children or grandchildren. The federal government does have a gift tax, but there are several exceptions. 

It’s essential to understand what the IRS considers a gift, which includes:

• Assets (stocks and bonds, etc.)
• Financial accounts (bank, retirement, or investment)
• Jewelry
• Loans with no or low interest
• Physical property (real estate, vehicle, etc.)

Suppose you’re unsure where your assets fit in terms of being subject to a gift tax. In that case, it’s highly advised to work with an experienced estate planning attorney who can help you identify what is or isn’t a gift and what might be done to avoid estate or gift taxes when transferring it to others. 

Each year, the IRS names the annual gift tax exclusion, an amount that, if not exceeded, can be given as a gift. In 2024, that amount is $18,000 per gift recipient. The amount is doubled if a husband and wife are giving the gift jointly. This is an amount that can be done annually.

However, it’s vital to understand that if the amount exceeds the annual gift, the IRS will view that as reducing the amount available in the lifetime cap (currently $13.61 million). When the lifetime exemption is exceeded, the tax rate could be as high as 40%. It’s best to talk to an experienced attorney about how to manage these gifts with as few repercussions as possible. 

Move Assets into Trusts

The larger the estate, the more likely it is to be subject to estate taxes, which can be sizable and reduce the value of the estate for the inheritors. One tactic to consider is creating a trust. That could allow you to reduce the size of the taxable estate by moving assets into the ownership of the trust rather than the person behind the estate.

However, there is an important consideration that shouldn’t be ignored. There are many types of trusts, with most falling into one of two categories: Revocable and irrevocable. Each comes with its own set of pros and cons.

• Revocable trust. As the term implies, this type of trust may be changed or canceled at any point when the person who created the trust is still living. That clearly provides flexibility, but if the trust generates any income while the creator is still alive, that will be considered taxable income to them.
• Irrevocable trust. This type of trust cannot be changed or canceled once it’s finalized, which can be concerning. However, this type of trust is more likely to be shielded from some or all estate taxes, depending on what’s contained in the trust and its overall value.  

How Can I Learn About Tax Law Changes That May Affect My Estate in California?

Call Cava & Faulkner at 916-685-1225 for a free consultation. Tax law and estate planning are both complex subjects, even more so when they intersect. There are many tactics for handling estate planning while managing taxes. Every estate is unique, and there’s no one-size-fits-all approach to creating an estate plan. Our team of knowledgeable, experienced estate planning attorneys can walk you through your estate and help determine the best approach to protect your assets for the next generation.