Shield Your Large Estate from Coming Changes to Federal Estate and Gift Tax Exemptions

Remember the Y2K scare?

If you’re of a certain age, then you probably recall the blood-chilling fear that our vast global financial network wouldn’t be able to handle a simple date change from the year 1999 to 2000.

As Dick Clark prepared for another of his rockin’ New Year’s Eve parties, computer experts and financial analysts weren’t feeling so festive. They were gravely concerned that everything—including banking infrastructures—would get wiped out when the digits flipped from “99” to double zero in most systems.

It would be like the world stepped into a time machine—at least, that’s what our computer systems would think. For the Weekly World News, it was even worse: a global apocalypse.

But it was all wrong. The Y2k scenario sounds like the good premise for a sci-fi thriller, but it didn’t happen. The systemic transition to the year 2000 started without any digital meltdown.

Public concerns about the year 2000 may have been exaggerated, but there’s another year that’s looming and that some people should definitely be concerned about.

2025.

Are you ready for it?

It has nothing to do with computer systems: That’s the year when a federal estate and gift tax exemption enacted in 2018 is set to sunset by that year’s end.

For many people, the law’s expiration won’t mean very much; but for individuals with high net worth estates, the law’s ending is going to leave a large portion of their estates exposed and vulnerable to estate and gift taxes.

Ok, so what do we mean by “high net worth”? For individuals, the current 2020 exemption covers individual estates up to $11.58 million—for couples, that’s double, or about $23.16 million.

But these exemptions will go away after December 31, 2025—even sooner depending on what happens to the leadership of Congress in upcoming elections. When they do, the higher exclusion is expected to drop down to $5 million for individuals and $10 million for couples, before inflation adjustments.

Ever since the tax law’s enactment, each year’s increasing exemption (last year it was $11.18 million for individuals) has made some people think—wrongly—that there’s no need to develop an estate planning strategy. But 2025 is not very far away, and it’s time to think seriously about the best ways to protect your assets.

How can you get prepared for the coming changes? The law offices of Christopher B. Johnson have some suggestions.

• Think about making gifts from your estate now.

When you make gifts from your estate now, you’re doing this before the assets appreciate more in value and add to a potentially higher tax burden in 2026. If you’ve been planning to make a gift all along, why wait? Making a gift is a simple way to help reduce your future exposure.

• Establish a life insurance trust.

People forget about the value of life insurance policies as parts of their estates. Set up an irrevocable trust that buys life insurance for you rather than buying the policy as an individual. Why? When that policy matures at your death, all of the proceeds will be tax free whereas if you just have regular life insurance, it will be included in the taxable value of your estate—and the death benefit could very well push your estate over the exemption threshold.

You were probably told that life insurance isn’t taxed, which is partially true. The policies are generally income-tax free, but without a life insurance trust, the payouts are subject to estate tax.

• Give partial or fractional interest in your assets as gifts.

A common practice for estate planning involves what’s known as a gift transfer of “fractional interest” in an asset, usually a piece of real estate or a business entity, like an LLC.

Instead of transferring the entire gift upon your death, make smaller gifts now—say 2 or 3%–of the asset’s value to recipients identified in your estate plan. Such transfers require a valuation (usually in the form of an appraisal) and that translates into a good discount that can help you with current charitable deductions on your estate.

Fractional interest gifts are a great way to leverage the value of an asset that you’re not ready—or able—to fully transfer over now (like the building your family business is renting) and enjoy some current tax benefits. People often assume that it’s an all-or-nothing proposition when it comes to making transfers—they don’t realize that gifts of fractional interest are a perfect alternative as well as a sensible tax strategy.

***

So, do you think you’re ready for 2025? Five years is not a long time. If you have a high net worth estate, it’s time to start planning now.

Contact the law offices of Christopher B. Johnson and discuss your estate goals with his team, the kinds of assets you have, and any potential charitable deductions that will improve your situation.

Start realizing some smart estate advantages now—you’ll be very glad you did. (Your heirs will be, too.)