The way we approach estate planning is changing because of the sunset of the lifetime exclusion for the estate and gift tax exemption. Understanding this sunset and implementing strategic gifting techniques can be pivotal for individuals seeking to maximize wealth transfer while minimizing tax implications. In this article, we will explore the implications of the potential sunset and various gifting strategies to consider before it takes effect.

The Sunset of the Lifetime Exclusion:

The lifetime exclusion for the estate and gift tax exemption, a significant component of the tax code, has been a key tool in estate planning. As of 2024, the exemption is set at $13.61 million per individual. However, this exemption is scheduled to sunset at the end of 2025 and revert back to the previous $5 million level, unless a change in law is enacted. The exemption will be adjusted for inflation and is expected to be about $6.4 million at the reversion. The sunset is a crucial aspect to consider as it can have profound implications for the taxation of wealth transfers.

Gifting Strategies Before the Sunset:

1. Maximizing the Current Exemption: Given the uncertainty of the future exemption amount, individuals may consider utilizing the current higher exemption to transfer significant assets tax-free. This could involve making substantial gifts to heirs or establishing trusts to benefit future generations.

2. Annual Exclusion Gifts: The annual gift tax exclusion allows individuals to make gifts up to a certain amount per recipient each year without reducing their lifetime exemption. This can be an effective way to transfer wealth gradually and reduce the overall taxable estate. For 2024, the annual gift tax limit is $18,000 per recipient per year.

3. Spousal Lifetime Access Trusts (SLAT): A SLAT allows one spouse to create an irrevocable trust for the benefit of the other spouse. Assets transferred to a SLAT are removed from the grantor spouse's taxable estate, potentially reducing future estate tax liability. Using the gift tax exemption, the grantor can make significant contributions to the trust without incurring gift tax. A major consideration of creating a SLAT is relinquished control over the assets which can pose a serious problem if the marriage dissolves.

4. Creditor Shelter Trusts (CST): A CST also known as a bypass trust is designed to maximize the use of both spouses' federal estate tax exemptions. By using the deceased spouse's exemption to fund the trust, the assets within the trust can appreciate and pass to heirs without being subject to estate taxes upon the surviving spouse's death. One downside is that assets transferred to the credit shelter trust do not receive a step-up in basis upon the death of the second spouse. This could result in higher capital gains taxes for heirs when they sell appreciated assets.

5. Charitable Giving: Engaging in philanthropy not only supports meaningful causes but can also be a tax-efficient strategy. Charitable trusts, donor-advised funds, or direct gifts to charitable organizations can help reduce the taxable estate while making a positive impact. Cash contributions are deductible up to 60% of adjust gross income.

Additionally, individuals who are at least 70 ½ can make donations up to $100,000 per individual per year directly to a public charity from a qualified IRA. This counts towards the individual's required minimum distributions, and is not included in AGI, potentially allowing the individual to deduct more itemized deductions that are based on AGI.

Other gifting options could include front-loading 529 savings plans with up to five years of annul gifts for beneficiaries. For 2024 donors may contribute $90,000 at once, per person, per beneficiary, (which doubles with a spouse) without incurring the gift tax and it won't count towards the lifetime gift tax exemption if no other gifts are made to the same beneficiary during the five-year period.

6. Family Limited Partnerships (FLPs) and Family Limited Liability Companies (LLCs): Establishing FLPs or Family LLCs can facilitate the organized transfer of family wealth. By gifting or selling interests in these entities, individuals can leverage valuation discounts, reducing the overall taxable value of the estate. These entities also provide a way for related family members to pool their resources and pass a business easily form one generation to another.

In the realm of estate planning, the potential sunset of the lifetime exclusion for the estate and gift tax exemption adds a layer of complexity. Implementing strategic gifting techniques before the sunset can be instrumental in preserving wealth and minimizing tax liabilities. As the regulatory landscape evolves, consulting with legal and financial professionals is paramount to ensure that gifting strategies align with current laws and individual circumstances. By proactively navigating the changing tax environment, individuals can secure a more efficient and impactful transfer of assets to future generations.