Timely and Important Information to Help Grow your Wealth

With this note, we introduce a new communication piece that will focus on a broad range of wealth management issues.  In the financial planning we do for our clients, I am often asked to address matters dealing with estate planning, tax law changes and strategies, insurance, charitable giving, and other related topics.

As more of these issues impact the long-term growth and protection of our client’s assets, we thought it might be helpful to periodically highlight new developments we are seeing in these areas, and share our perspective on the options all of us have in determining what makes the most sense for each of us.

Now that we have turned the calendar to 2024, are you ready for 2025?  You probably think that question is truly premature, but there are a number of tax provisions that are set to expire at the end of 2025 that we are paying attention to.

2024/2025 Tax Issues

Foremost of those provisions is the Federal estate and gift tax exemption which is set to expire on December 31, 2025.  The current estate tax exemption has grown to $13.61 million per individual.  Without an action by Congress, at the conclusion of 2025, that exemption amount is scheduled to drop back to the previous level, as adjusted for inflation, of around $7 million.  Not only is this a dramatic change, the maximum gift and estate tax rate is set to increase to 45% from the current 40% at the same time.

Tools Available to Reduce Taxes

The primary way to reduce potential estate taxes is to remove assets from your estate.  There are numerous ways to do this.  One option which we often recommend is making annual gifts to your family members.  For 2024, you can give any individual up to $18,000 tax-free or up to $36,000 if you are married and file a joint return.  There is no limit to the number of family members you can give gifts to in a calendar year.

Another consideration for reducing estate assets is what’s called superfunding – making a front-loaded contribution to a 529 Plans for educational costs.  With the annual gift exclusion now $18,000 per person, an individual can make a 5-year gift of $90,000 (5 x $18,000) to a 529 plan, or $180,000 per couple.  This allows you to contribute a lump sum today versus spreading it out over 5 years.

This does require the filing of an informational Form 709 with your next 5 annual tax returns, though no tax will be due. The donor must live until January 1 of the 5th calendar year to earn the full 5-year gift annual exclusion.  Once you opt to do the 5-year superfunding, that election applies to all of the money you contributed in this event and is attributed as 5 equal payments.  The growth of the funds within the 529 plan is tax-free as long as the assets are withdrawn for qualified educational expenses

Trust Options

You might also consider the transfer of part of your assets to a charity through a trust – a charitable lead trust (CLT) or a charitable remainder trust (CRT).  In a CLT you transfer some of your assets to a trust for the tax-exempt charity, providing support to the charity for a period of time and lowering the value of your estate.   At a specified term or at your passing, whatever is left in the trust is passed to your beneficiaries.  In a CRT, you can transfer appreciating assets to an irrevocable trust and make and receive income off of those trust assets in your lifetime.  At a specified term or at your death, the assets pass to the charity.

A Spousal Lifetime Access Trust (SLAT) can be a good potential tool for placing assets in an Irrevocable Trust, permanently removing the assets from the trust grantor’s estate.  In a SLAT, the grantor spouse will name the other spouse as the beneficiary of the trust during their lifetime.  As long as the two remain married and the beneficiary spouse is living, the grantor spouse has indirect access to the trust assets via the beneficiary spouse. Many find this spousal option preferable to moving assets to an Irrevocable Trust in a descendant’s name in terms of maintaining more control of the assets.

Generally, a SLAT is funded with cash and assets that the grantor has an established cost tax basis in, because the assets transferred to the SLAT will never get a step-up in basis.  The SLAT is taxed as a grantor trust for tax purposes, meaning that the grantor is responsible for the income taxes attributed to the trust assets whether the income remains in the trust or is distributed to the beneficiary spouse.  However, the appreciation in the assets after transfer to the SLAT will still remain out of the grantor’s estate.

A consideration in transferring assets to a SLAT or other substantial gifts is to ensure that you still have adequate liquidity for the payment of taxes on SLAT income and for your future needs.

Estates Estimated to be in Excess of 2026 Exemption Levels

If you think that you may have a taxable estate after 2025 in excess of what would be the reduced lifetime exemption levels, it makes sense to keep this issue on your radar.  Predicting the path of tax legislation, particularly in an election year, is difficult.  We expect attorneys and other estate planning professionals will be very busy as the end of 2025 approaches.

We encourage you to regularly review your trust planning, particularly if those trusts were drawn up when your family members were minors or if potential successor trustees have pre-deceased you.  I would be happy to visit with you about any questions regarding your estate planning or other pertinent wealth management topics. We can also make recommendations from our Strategic Partners if you do not currently have an estate tax attorney.