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  • Writer's pictureJay Judas

Tier One: Use It Or Lose It

There is now less than three years left for taxpayers to use their federal estate and gift tax exemption before the amount falls considerably at the end of 2025. Currently, the per person exemption is $12,920,000 and we can expect to see that increase around $90,000 in each of the next two years before sunsetting to a figure between $5 million and $6 million per person ($5 million adjusted for inflation).


In making this simple, if you and your spouse have an estate that is less than the current exemption, you do not have to worry about the federal estate tax – if you both die this year. However, any estates worth more than that are taxed on the amount that surpasses the $12.92 million threshold. For most of the federal estate tax tiers, you’ll pay a base tax, as well as a marginal rate. Current federal estate taxes max out at 40% for taxable amounts greater than $1 million.

For example, let’s say you are single and your estate is valued at $50 million in 2023. That means your total taxable estate is $37,080,000, as it’s worth that much more than the $12.92 million threshold. That means your federal estate tax due would be $37,080,000 x 40% = $14,832,000.


The Loss Could be Bigger Than You Think

“Use it or Lose” applies in two ways to this exemption. The first way is rather obvious – if you do not die before the exemption sunsets at the end of 2025, you will lose $7 million to $8 million. The other way to lose the exemption is to not make use of it as soon as possible to move appreciating assets out of your estate so that the value of these assets grow out of the reach of an estate tax.


As an example, gifting interest in a family business or property to an irrevocable trust today locks in the value of the gift for the exemption at current value (value that may receive a discount for a number of reasons). The gift asset will grow inside the trust and not in your hands where the increase in value will be subject to taxation. This amount can be meaningful, especially if you die decades after making the gift.


Keep These Three Items in Mind

When thinking about using your federal estate and gift tax exemption, keep in mind these three items:

  1. You do not get to choose which part of the existing exemption you get to use. For instance, you cannot claim to use the “top $7 million” today so that when the amount sunsets at the end of 2025, you still have the full amount left to use in 2026. If you use $7 million today and the exemption is $5,500,000 in 2026, you are done. You should have used the full amount available as soon as it was available in 2023, 2024 and 2025.

  2. If you wait, your estate planning attorney may not have time for you. The estate planning attorneys with the top firms and best reputations will have their hands full with affluent clients just like you who procrastinated about using their exemption. Many of these clients will also need soup-to-nuts estate planning, further exacerbating the traffic jam. As most who work with attorneys on estate matter know, most matters take many months and not just a couple of weeks. Making asset transfers to an irrevocable trust (if the trust has been established) involves selecting assets, retitling ownership, interaction with the trustee and a slew of legal work. For this reason alone, someone should not wait to use their exemption.

  3. Once you have your exemption used and have a better grip on what your future estate tax liability will be, be sure to purchase cash value life insurance within your irrevocable trust to pay that liability. Someone is never younger and rarely in better health than they are today so applying for life insurance sooner-than-later is recommended.

At Life Insurance Strategies Group, we do not sell life insurance. We work with affluent families and institutional clients in helping them make decisions about complex transactions involving life insurance.

 

Since its inception, Life Insurance Strategies Group has solely focused on the individual high net worth life insurance market. We do not sell products. This allows us to offer unbiased, pragmatic advice. Visit us at www.lifeinsurancestrategiesgroup.com.




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