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Proactive Planning For The Upcoming Sunset Of Estate Tax Law Changes


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Communication and planning have always been essential when attempting to transfer wealth efficiently. Tax planning can also play a significant role for larger estates. Currently, the federal estate tax laws are very generous, however, when the 2017 Tax Cuts and Jobs Act (TCJA) rules expire at the end of 2025, that might not be the case. We believe in proactive tax planning and waiting until the tail-end of these time constrained rules could cost you. We like to be ahead of changes, especially when it comes to a potentially major tax liability.


The Tax Cuts and Jobs Act (TCJA)


Starting in 2018, the TCJA doubled the estate and gift, and GST tax exclusion amounts.  As our chart shows, this exclusion has moved from $5.49 million for an individual in 2017, all the way up to $13.61 million in 2024. For couples in 2024, the tax exclusion is $27.22 million. 


The doubled amount sunsets, or expires, on December 31, 2025. For high-net-worth individuals, this could affect wealth transfer strategies. As the tax law presently stands, the current lifetime estate and gift tax exemption will revert to pre-TCJA levels and will be cut in  half and adjusted for inflation on January 1, 2026.  With current inflation statistics, this could bring the amounts to around $7 million for individuals and $14 million for couples in 2026.


While there could very well be new tax legislation between now and the expiration date, when reviewing estate plans, families should consider that this TCJA provision is scheduled to expire. Proactive estate and tax planning could help avoid a costly missed opportunity.


While many Americans do not need to worry about this sunsetting tax law, as their net worth does not meet the minimum, it is still important that they have estate planning documents to help transfer assets and wealth to their loved ones efficiently.   Also, some states have estate tax transfer taxes that start at much lower levels than the federal amount. For those who are close to the potential after sunset federal limits, but not there yet, they should watch the growth of their net worth to stay on top of it. Wealthy individuals and families should not procrastinate, and we recommend planning now to ensure preparedness for the pending drastically reduced limits. 


TCJA

In this article we want to provide you with valuable information. However, navigating estate planning can be challenging and difficult, so checking with both your estate planning professional and financial professional is always advised. We are always available if you have any questions regarding your personal financial situation.


Wealth Transfer and Strategic Gifting


The passing of a loved one brings many emotional challenges, so having your estate plan carefully prepared well in advance can offer the solace of knowing your loved ones will not have to navigate financial and legal challenges while they are grieving. There are two major ways to transfer wealth: leaving an inheritance after you pass, or gifting during your lifetime. 


The latter can be particularly alluring and can offer some tax-saving possibilities. Many families can look at transferring wealth during someone’s lifetime without incurring any federal gift or estate taxes. This is usually in addition to the annual exclusion for gifts, which in 2024 is $18,000 for individuals and $36,000 for couples.


For example, John has an estate valued at $15 million and in 2024 transfers $10 million to a trust for his children. Under the current TCJA provisions, he can use the $13.61 million exclusion to make that $10 million transfer tax-free. However, if he waits until 2026, the exclusion amount is scheduled to be about $7 million after the TCJA sunset, meaning $3 million of the $10 million gift would be taxable. A relatively small difference in timing can result in a huge tax bill. 


Federal Estate Tax

Before making any moves or decisions about your gifting strategy, please consult with us. It is critical to understand potential tax implications and ensure everyone involved in your estate plan, including your heirs, optimize and take advantage of the best strategies for your situation. 


Wealth Transfer and a Bypass (Family) Trust


Another popular method of optimizing tax exemptions for married couples is a Bypass Trust. When one spouse passes, a portion of their assets can be placed into a trust which passes to their beneficiaries on the death of the surviving spouse. The assets placed into this trust, and any appreciation of those assets, are protected from estate taxes when the surviving spouse passes away.


This strategy, like many others in estate planning, can be complicated and the tax ramifications and appropriateness should always be discussed with a qualified estate planning attorney and financial professional before making any decisions. 


Portability for Estate and Gift Tax


In very simple terms, portability is a way for spouses to combine their exemption from estate and gift tax. In most circumstances, it’s a process where a surviving spouse can realize and use the unused estate tax exemption of a deceased spouse, so then, the surviving spouse has both their own exemption from estate and gift tax and, the unused exemption of the deceased spouse.  This can be a highly complicated process that requires filings and needs to be discussed with your financial professional and estate planning attorney. 

Estate Planning Essentials

Keeping Your Estate Plan Current - Don't Forget the Basics!


Even if your estate plan is not affected by the sunsetting TCJA provisions, it is still wise to have an updated estate plan. Life happens and not having proper documents can cause undue stress and work for your loved ones.  It’s important to keep your estate plan updated. Divorces, marriages, children coming of age, new children, or grandchildren – are among the major, but easily overlooked occurrences that can directly affect your estate plan. 


Revisiting your beneficiaries is important as well. Many people grow fond of new charities, individuals may no longer be appropriate candidates, or percentages may change. 


You’ve spent a lifetime acquiring your estate, it is important to preserve your legacy in the manner in which you desire. If you would like to review your estate plan with us, please contact our office and we would be happy to review it with you.


Use It or Lose It!


At present, the potential for you to lose your opportunity to leverage the higher exemption levels is a possible scenario. Don’t postpone your opportunity to explore the options currently available to you! 

Key Reasons

We value our clients and are honored to be a part of their journey. We strive to understand the objectives of each individual so we can create an optimal plan. 


As a reminder, please keep us aware of any changes (such as health issues, changes in your retirement goals, or the sale of a home). The more knowledge we have about your unique situation the better equipped we will be to best advise you. If you’d like to have an assessment of your investment portfolio and overall financial picture, we can discuss this at your next review meeting, or you can call us to set up an appointment. 


As always, we appreciate the opportunity to assist you with all your financial needs. 


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Disclosure:


Advisory Services offered through Materetsky Financial Group Inc., a Registered Investment Advisor. Securities offered by Registered Representatives through Private Client Services, Member FINRA/SIPC. Private Client Services and Materetsky Financial Group Inc. are unaffiliated entities. All insurance products are offered through unaffiliated insurance companies. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Materetsky Financial Group, Inc. [“Materetsky]), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Materetsky. Materetsky is neither a law firm, nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice. A copy of the Materetsky’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request or at www.materetsky.com. Please Remember: If you are a Materetsky client, please contact Materetsky, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian. Note: The views stated in this letter are not necessarily the opinion of broker/dealer, and should not be construed, directly or indirectly, as an offer to buy or sell any securities mentioned herein. Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. With any investment vehicle, past performance is not a guarantee of future results. Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. This material contains forward looking statements and projections. There are no guarantees that these results will be achieved. All indices referenced are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. The S&P 500 is an unmanaged index of 500 widely held stocks that is general considered representative of the U.S. Stock market. The modern design of the S&P 500 stock index was first launched in 1957. Performance prior to 1957 incorporates the performance of the predecessor index, the S&P 90. Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stocks of companies maintained and reviewed by the editors of the Wall Street Journal. Past performance is no guarantee of future results. CDs are FDIC Insured and offer a fixed rate of return if held to maturity. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. There is no guarantee that a diversified portfolio will enhance overall returns out outperform a non-diversified portfolio. Diversification does not protect against market risk. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. There is no guarantee that a diversified portfolio will enhance overall returns out outperform a non-diversified portfolio. Diversification does not protect against market risk.

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