The Tax Cuts and Jobs Act of 2017 (TCJA) contained provisions affecting the estate tax. Along with several other provisions of the act, these changes are scheduled to sunset in 2025 unless Congress passes further legislation extending them or changing them.

Wealthier individuals and families need to understand what they need to consider moving forward to reduce the impact of these changes.

What Is the Estate Tax?

The estate tax is a tax levied on the estate of a deceased person when it is transferred. It is calculated using the value of the estate before distribution. This is sometimes called a "death tax." For 2024, the exemption amount is $13.61 million per individual or $27.22 million per married couple. This means that there is no tax levied on estates below this value. The tax is not meant to interfere with ordinary people's modest inheritances but rather to impact the wealthy.

The Impact of the TCJA

As a result of increasing house prices, estates are becoming more valuable. Part of the TCJA addressed this by increasing the exemption from $5.49 million per individual in 2017 to $13.61 million per individual in 2024 ($10.98 million in 2017 and $27.22 million for married couples in 2024), gradually increasing over the last 7 years indexed to inflation.

This allowed more wealth to be transferred before triggering the tax, primarily benefitting higher net-worth individuals with estates worth $6 to $13 million or so. It also benefitted people in areas with extremely high housing prices.

Sunsetting Provisions on Estate Tax Exemption

Most provisions of the TCJA, including this one, are set to expire on December 31, 2025. Congress could pass an act to extend this or to replace it with a different tax bill, but if no action is taken, the exemption amount will revert to the pre-TCJA level, adjusted for inflation.

An exact figure is hard to determine, but the best estimate is that it will be somewhere around $6 million for individuals. This change will dramatically impact individuals with a net worth around $6 million and married couples with around $12 million.

Potential Impacts

These individuals and families should brace for potential impacts, which include:

• Increased tax liability. Estates that were not subject to the tax will suddenly become vulnerable, increasing the tax burden on many families.
• Estate planning strategies. High-net-worth individuals and families may want to revisit and possibly revise strategies to consider the lower exemption. Some families that did not have a comprehensive strategy may need to implement one.
• Gift and Generation-Skipping Transfer Taxes. These limits are pegged to the estate tax limit to prevent people from using gifts to avoid the estate tax. You may need to change your strategy.

Estate Planning Considerations

While there is a non-zero chance that the TCJA will be extended, it's best to plan for the very real possibility that it will not. It is absolutely vital that you take the following steps:

1. Review your existing estate plan. Ensure that it aligns with the lower exemption levels and that you take every step to minimize liability.
2. Consider gifting strategies. While the gift tax limits are also going to go down, properly designed gifting strategies can still help reduce tax burdens, especially if done early enough.
3. Consult a professional. It's time to sit down with your tax advisor, wealth advisor, and estate planning attorney to help come up with even better strategies to spare your family a huge tax blow in the event of your death.

Legislative Uncertainty

If nothing changes, then the estate tax provision will sunset. There is a fair amount of conflict about what Congress should do. In general, Republicans believe in extending the cuts to benefit Americans, but many Democrats are concerned about the deficit, including President Biden.

Whether anything will be done may, in part, depend on the results of the November election. For now, it is best to plan for the assumption that nothing will change.

The sunsetting of the TCJA's provisions regarding estate tax is significant for many high-net-worth individuals and families. You should be taking steps now to protect your family from an elevated tax burden. For professional advice to develop a comprehensive estate planning strategy, contact CrossleyShear today.

While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of CrossleyShear and not necessarily those of Raymond James.