Since it was enacted, we’ve been aware of the Tax Cuts and Jobs Act’s built-in “sunset” date of December 31, 2025. Come the first day of 2026, almost all of the legislation’s significant changes to tax-related provisions will revert to what existed before the TCJA was passed in 2017. At that time, the sunset date seemed far off. Now, in 2024, it is rapidly approaching. The time to plan for the sunset is now — let’s break down what is at stake.
Federal estate, gift and generation-skipping transfer (GST) tax considerations
The Tax Cuts and Jobs Act’s changes to these tax provisions were fairly narrow in description but broad in application. The Internal Revenue Code established that a tax must be paid when asset transfers are made during life (the gift tax), after death (the estate tax), or to an individual two or more generations below the donor’s (the generation-skipping transfer tax). The tax imposed for all three is a flat 40% and must be paid either when a taxpayer files a gift tax return (for the gift tax and, sometimes, the GST tax) or when the estate of a decedent files the federal estate tax return (for the estate tax and, sometimes, the GST tax).
Importantly, the Internal Revenue Code provides that everyone may give a certain amount tax-free. This amount is often referred to as the unified credit amount, or the exemption amount. Prior to 2017, this exemption amount was $5 million, indexed for inflation. Once enacted, the TCJA doubled the exemption to $10 million, indexed for inflation. In 2024, it increased to $13.61 million after indexing. This also means that married couples can collectively give away $27.22 million, either during their lifetimes or after their deaths. Once 2026 arrives, that amount will be cut in half if no changes are made to the tax laws before then.
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What does this mean for you, the taxpayer?
Cutting the current exemption amount of about $13.61 million in half will result in the exemption amount being about $7 million. This means if a taxpayer does not use any of their exemption prior to the sunset date, the cost of not using that exemption will be about $2.644 million.
To calculate this number, subtract $7 million from $13.61 million to arrive at $6.61 million. This is the approximate amount of exemption the taxpayer loses if not used before the sunset. The tax imposed on this amount is equal to 40%, or a $2.644 million total effective loss through federal estate or gift tax, and possibly GST tax.
How can you avoid this result?
Plan now to give away your available exemption amount before the TCJA sunsets at the end of 2025. To do this, some individuals may decide to give assets to an irrevocable trust. One common and popular irrevocable trust is called a spousal lifetime access trust, or SLAT for short.
A SLAT is what its full name suggests — a trust created to provide the donor’s spouse with access to its assets. More simply, this is a trust I create for my spouse, primarily, and my descendants, secondarily.
Why is this a popular strategy? If I give assets to a SLAT and my wife receives a distribution from the trust, she can do what she wants with the money — buy something, pay a bill or share it with her husband (me). There are no transfer tax consequences for giving assets to your spouse, and with a properly structured trust, these assets, along with any growth, will not be taxed at my death.
I may be more willing to give significant assets away if I know that my wife can share those assets with me if she chooses. If we divorce or my wife dies, my access to the assets ends. When she dies, the assets pass to the next beneficiaries in line, often the donor’s descendants, who, in my example, would be my children and grandchildren. At that point, I lose access to the SLAT assets. What I have successfully done, though, is make use of my available exemption by transferring it to an irrevocable trust that I have designed to be primarily for my wife’s benefit. My wife may choose to share those assets with me in the future, and as a result, I may feel better about making this significant gift.
Why plan now?
While two years seems like a long time, careful deliberation is required to make decisions around gifts of large sums and to plan the ways in which to give these assets away. First, you decide you can afford (and want) to give significant assets away. Second, you decide to whom and how you want to give the assets — and what assets should be given. Third, you consider who gets them, when and why. Fourth, you engage an attorney to prepare the trust. Fifth, you and your advisory team review and modify the trust to your desired specifications. Sixth, you and your attorney finalize the necessary documents, and you sign them. Finally, you fund the trust with the assets.
At any point, you may experience delays. Why not start the process now so you have time to reflect and decide what makes sense? You can follow every step, then wait to fund the trust (or decide not to) closer to the sunset date.
When it comes to financial planning, it’s always critical to surround yourself with an advisory team that works collaboratively with your tax preparers and attorneys to assess your full picture and achieve the best outcome for you. Engage your team now to ensure you can proactively plan — not fail to assess.
Advisory services offered through Fidelis Capital Partners, LLC., an Investment Adviser registered with the U.S. Securities & Exchange Commission. Registration does not imply a certain level of skill or training. Please refer to our ADV brochure found at https://adviserinfo.sec.gov/ for a complete list of services and description of fees. All investments involve risk and unless otherwise stated, are not guaranteed. Fidelis Capital Partners, LLC. does not give tax advice. Be sure to consult with a tax professional before implementing any investment strategy.
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