TCJA

The Tax Cuts and Jobs Act (TCJA) of 2017 brought significant changes to estate planning, notably increasing exemptions for estate, gift, and generation-skipping transfer taxes. These changes have provided high-net-worth individuals and families with greater opportunities to transfer wealth to their beneficiaries while mitigating taxes.

However, with key provisions of the TCJA set to expire in 2025, it may be time to revisit your estate plan. Even if your portfolio is way below the exemption amounts (below), compounding returns are a powerful wealth builder, and your future values could quite possibly reach and exceed the limits.

 It must be noted though, that Congress will debate the expiration of these tax provisions, and we do not know the outcome yet.

Key Tax Changes Under the TCJA of 2017

The Tax Cuts and Jobs Act (TCJA) of 2017 meaningfully reshaped the tax landscape, offering wealthy individuals and families a way to pass more assets to beneficiaries tax-free. Key legislative changes included:

• A significant increase in the federal estate tax exemption. As of 2024, individuals can transfer up to $13.61 million, or $27.22 million for married couples, without incurring federal estate taxes, offering a rare opportunity for families to pass on substantial wealth tax-free. However, the increased limits are scheduled to sunset at the end of 2025, reverting to their pre-TCJA level of $5.6 million and $11.2 million (adjusted for inflation. The inflation-adjusted amount will probably land in the $7-8 million range).
• Alignment of the lifetime gift tax exemption with the federal estate tax exemption. The lifetime gift tax exemption, currently set at $13.61 million, provides significant flexibility for making substantial gifts. As of 2024, you can also give up to $18,000 per recipient annually without impacting your lifetime exemption.
• Reduction of the generation-skipping transfer (GST) tax. The GST exemption, currently aligned with the estate tax exemption at $13.61 million, provides a significant opportunity to transfer wealth to grandchildren or even great-grandchildren without triggering this additional tax.

It’s important to note that these TCJA estate planning provisions are set to expire at the end of 2025 unless Congress votes to extend them. Depending on your individual circumstances, taking advantage of the current high limits, you can potentially preserve more of your estate from tax.

Estate Planning Strategies to Be Aware Of

With the expiration of the TCJA approaching, now is an opportune time to explore strategies that align with your values and long-term goals.

#1: Lifetime Gifting

To make the most of the current elevated exemptions before the Tax Cuts and Jobs Act (TCJA) expires, several gifting strategies can help transfer wealth efficiently while minimizing tax burdens:

• Creating Irrevocable Trusts. By transferring assets into an irrevocable trust, you effectively remove them from your taxable estate, which helps shield them from estate taxes when the TCJA exemptions potentially decrease in 2026. Additionally, you can structure an irrevocable trust to retain control over how and when beneficiaries access the assets, providing peace of mind that they’ll use your wealth according to your wishes. Keep in mind that irrevocable means that once the trust is executed, it cannot be changed.
• Direct Payment of Medical or Educational Expenses. Payments made directly to medical institutions or schools aren’t subject to the annual gift tax exclusion or the lifetime exemption, meaning they don’t count against your gifting limits. This is a tax-efficient way to provide significant financial support to your loved ones without reducing your lifetime exemption, and it allows you to give in a meaningful way without adding to their taxable income.
• Transferring Appreciating Assets. Another key strategy is to transfer appreciating assets, such as stocks, real estate, or business interests, while their value is still growing. By gifting these assets before they appreciate further, you can reduce your taxable estate while allowing the recipient to benefit from future growth.

Each of these approaches offers unique advantages and can be tailored to fit your financial goals and family’s needs.

#2: Dynasty Trusts

If you have grandchildren or great-grandchildren, advanced estate planning strategies like dynasty trusts can be highly effective for preserving wealth across multiple generations.

A dynasty trust is a long-term trust that enables the transfer of wealth from one generation to the next, often over several decades or even centuries. This type of trust not only helps protect your legacy but also shields the assets from potential risks such as creditors, lawsuits, and divorces, ensuring your family’s financial security for years to come.

You can also structure the trust in a way that minimizes or eliminates estate taxes, gift taxes, and generation-skipping transfer (GST) taxes, allowing your family to benefit from the full value of the assets you’ve transferred. By establishing the trust while the current elevated exemptions are in place, you can lock in these favorable tax treatments before the TCJA provisions expire in 2026.

#3: Grantor Retained Annuity Trusts (GRATs)

For those seeking more sophisticated estate planning strategies, Grantor Retained Annuity Trusts (GRATs) can be an effective tool for transferring future appreciation of assets in a tax-efficient manner ahead of potential TCJA expirations.

A GRAT allows you to place high-growth assets, such as stocks or real estate, into a trust while retaining the right to receive fixed annuity payments over a specified term. The key benefit is that any appreciation in the assets above the IRS’s assumed growth rate passes to your beneficiaries tax-free at the end of the trust’s term.

This strategy works particularly well in a low-interest-rate environment, where the hurdle rate is low, allowing more of the appreciation to avoid gift taxes. Since the grantor retains the annuity payments, the initial gift value is minimal, often resulting in little or no taxable gift.

#4: Charitable Lead Trusts (CLTs)

Charitable Lead Trusts (CLTs) offer a unique way to support charitable causes while also benefiting your heirs in a tax-efficient manner.

In a CLT, you transfer assets to the trust, which then provides regular payments to a charity of your choice for a specified period. After this term ends, the remaining assets in the trust pass to your heirs, often with little or no gift or estate tax.

This strategy not only enables you to make a meaningful impact on the causes you care about, but it also helps reduce the taxable value of your estate. Because the value of the charitable payments is deducted from the overall gift, the remaining value that eventually goes to your heirs can be significantly discounted for tax purposes.

#5: Family Limited Partnerships (FLPs)

Family Limited Partnerships (FLPs) can be a powerful estate planning tool ahead of potential TCJA expirations.

An FLP allows you to transfer ownership of assets, such as real estate, investments, or a family business, to a partnership structure. Typically, senior family members (parents or grandparents) act as general partners, maintaining control over the management of the assets, while younger family members become limited partners with ownership interest but without decision-making authority.

The primary benefit of an FLP is the ability to transfer wealth to heirs at a discounted value. Because limited partners lack control and marketability, the IRS often allows a discount on the value of the partnership interests for gift and estate tax purposes, effectively reducing the taxable value of the transferred assets.

FLPs also offer the added benefit of asset protection, as creditors may find it difficult to access assets held within the partnership. This structure helps ensure long-term wealth management and continuity within families.

Estate Planning and the TCJA: Recommitting to Your Plan

Estate planning is never a one-size-fits-all solution. The most effective strategies are those tailored to your unique circumstances, financial goals, and family dynamics. A thoughtful estate plan strikes a delicate balance between tax efficiency, asset protection, and—most importantly—caring for the people and causes that matter most to you.

Regularly revisiting and updating your plan ensures that it evolves with changes in your life, such as new financial situations, family additions, or shifting priorities. By engaging in open discussions with your family and trusted advisors, you can craft a plan that truly reflects your values and ensures your legacy endures for generations.

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