Estate Planning Trends in 2024: Navigating the Changing Tax Landscape
As we venture deeper into 2024, the landscape of estate planning continues to evolve, presenting both challenges and opportunities. With significant tax changes on the horizon, it's imperative for individuals and families to reassess their estate planning strategies to ensure they are maximizing their wealth transfer in the most tax-efficient manner. In this post, we'll delve into the upcoming changes to the tax exemption amounts and rates, and explore strategic considerations to optimize estate plans before these changes take effect.
Understanding the Impending Tax Changes in 2026
The current tax landscape, under the provisions set to expire in 2026, allows for a generous tax exemption amount of $13.61 million. However, this threshold is poised to revert to its pre-2018 level of $5 million, adjusted for inflation, which is anticipated to be around $7 million. More pressing is the Biden Administration's proposal to further reduce the lifetime estate and gift tax exemption amount to $3.5 million and increase the estate tax rate from the current 40% to 45%.
This means that, under the current law, an estate valued at $10 million would not owe federal tax. But with the expected changes, such an estate could potentially face taxes on $3 million of its value at a rate of 40% or even 45%, depending on legislative outcomes.
Strategic Planning for the Future
Given these potential shifts, proactive planning becomes crucial. Below are some strategies to consider integrating into your estate plan before the 2026 changes:
1. Spousal Lifetime Access Trust (SLAT)
A SLAT is an irrevocable trust that allows one spouse to transfer wealth to the other while locking in the current higher exemption amount and excluding future appreciation from estate taxes. This strategy is beneficial for spouses wishing to take advantage of the exemption while providing financial support to the beneficiary spouse. However, it's essential for the donor spouse to maintain sufficient assets outside the SLAT to fulfill their financial needs independently.
2. Credit Shelter Trust (CST)
Upon the death of one spouse, assets can be directed into a CST, allowing the surviving spouse to benefit from these assets while ultimately passing them on to other beneficiaries tax-free. This strategy effectively uses the deceased spouse's exemption amount to protect assets from estate taxes upon the death of the surviving spouse. However, beneficiaries should be mindful of potential higher income taxes due to the CST's assets receiving only a single step-up in basis.
3. Permanent Life Insurance
Permanent life insurance differs from term insurance by offering a lifetime of coverage and accumulating cash value. This cash value can be leveraged through loans or withdrawals for various expenses. Importantly, life insurance proceeds are generally exempt from estate taxes, providing a liquid asset to cover estate taxes or compensate for wealth lost to taxes. This strategy is particularly appealing for estates at risk of exceeding the future exemption amount.
Regular Reviews are Key
The potential changes underscore the importance of regular estate plan reviews to ensure alignment with current laws and personal objectives. As tax laws evolve, so too should your estate planning strategies to safeguard your legacy and provide for your loved ones in the most tax-efficient manner possible.
Remember, these insights are a starting point for discussions on how best to prepare your estate for the upcoming changes. As always, I'm here to help navigate these complexities and tailor a plan that best suits your family's needs and goals. Feel free to reach out with any questions or to discuss your estate planning strategy in more detail.
As we look to the future, let's approach these changes not with apprehension but as an opportunity to reassess and reinforce our estate plans, ensuring that our legacies are preserved and passed on according to our wishes, in the most tax-advantaged way possible.