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ACM Journal - Investment Management
17 Jul

Chris’s Corner: – Planning for Estate Taxes

Estate PlanningIs it possible to have too much money? The answer is yes if the subject is estate taxes. Currently few of us have to worry about Federal estate taxes since the exemption is so high, but that is set to revert back to its former limit at the end of 2025. This means a reduction of approximately 50% from today’s generous level.

The current Federal gift and estate tax exemption is $12,920,000 per individual, or $25,840,000 per couple. If the exemption is allowed to expire, it will drop back to $5 million, and when adjusted for inflation it will be around $6.2 million. In 2021, the current Presidential administration proposed limiting the estate exemption to $3.5 million as part of its annual budget plan. The proposal did not make it into the final budget, but it does give a sense of how the administration thinks about this issue.

It is an important topic though, because the estate tax can be costly. Amounts over the exemption are taxed, and rates quickly rise to 40%. Although currently only a small portion of the population have taxable estates—per the Tax Policy Center it is less than 0.1% of the 2.8 million people who are expected to die this year—it did provide $27.1 billion in revenue for the federal government in 2021, per Datalab. The Congressional Budget Office expects that amount to double if the current exemption expires.

They may not be ideal, but there are things you can do to prepare for a reduced estate tax exemption:

  • Gifting – Make lifetime gifts now. You can make gifts up to the $12,920,000 exemption limit without having to pay taxes, though you will have to file gift tax returns for any amounts over $17,000. Gifts made now would count against current exemption amounts, regardless of what happens with future exemption levels.


  • Trusts – You can transfer assets into a Spousal Lifetime Access Trust or Grantor Retained Annuity Trust and permanently remove them from your estate. With a Spousal Lifetime Trust, you can receive indirect interest and access through income distributions. With a Grantor Retained Annuity Trust you are entitled to annuity payments for a specified number of years. After completion, the trust terminates and assets still within the trust are distributed to beneficiaries.


  • Intrafamily Loans – It is possible to make loans between family members, or to a family trust, which invests the money and then repays the loan. Once the loan is repaid, the assets that remain are protected from the estate by the trust and can be distributed to the beneficiaries. Intrafamily loans carry relatively low interest rates, improving the odds that net returns earned by investing loan amounts will exceed the interest owed.


  • Super Funding 529 Plan Accounts – You can contribute up to $85,000 ($170,000 for couples) into a 529 account per child or grandchild. This is considered five-year gift tax averaging, frontloading your annual gift-tax allowance in the first year. The growth and withdrawal of the funds are tax-free unless they are not used for qualified educational expenses. Qualified costs include tuition, books, and room and board.

None of these strategies are perfect, or without their drawbacks, but they may be worth considering. One potentially significant drawback is that when you transfer assets into irrevocable trusts, you lose the opportunity to capture stepped up basis. The step-up allows heirs to avoid taxes on gains in the value of assets that occurred prior to death.

Depending on where you live, estate taxes at the state level could add a double whammy to your inheritance goals. This is particularly true in New York where the exemption is only $6,580,000. Even worse, if your estate is over $6,909,000, you pay estate tax on the entire amount, not just the amount over the exemption. That can result in state estate taxes comparable to your federal estate tax even if the tax rate is lower. Again, the strategies listed above may be able to help you reduce your taxable estate to avoid state taxes.

It is still possible that the laws will change ahead of the estate tax sunset, but we wouldn’t bet on it. The 2024 election cycle is a full one, and includes potential changes in President, 34 senate seats, and all 435 house seats. In 2025 the newly elected government will need to agree on new laws or at least extend the current ones to avoid expiration. Given the current political environment, and likely narrow majorities, that may be too big an ask.

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