What a Summer we have had with the election fast approaching. Often Estate taxes are not an area that I deal with much as the exemption has been so high. For 2024, the exemption is $13,610,000 per person. That makes your average married couple able to pass along $27,220,000 tax-free to the next generation with little or no planning. Before you stop reading because you will never have that much net worth, you need to realize lawmakers have the ability to change this at any time. Also, if they do nothing, the law will change and become much lower in a little over a year.
The Kiplinger Tax Letter got me thinking about this topic a lot over the last couple of days. The article focuses on the fact that we don’t know what lawmakers will do, but we do know what the basic options will be. I think it is good to understand these options if your estate will have a value of over $3 million.
The first option would be to do nothing. If this happens, the Trump tax cuts would sunset after 2025. That would cause the Estate tax to reset at precut rates. The result would be an Estate tax exemption of approximately $7 million adjusted for inflation for people that die in 2026 and after.
The second option would be to leave things as they are. This would keep the current exemption adjusted for inflation and maintain the top 40% tax rate. Trump promotes his desire to make the 2017 tax cuts permanent.
A third option would be to find a middle ground on the exemption. This option would likely come up with an exemption that is somewhere in between the $7 million and $13.6 million amounts found in options 1 and 2. This option may be likely depending on who is in power and the willingness to negotiate.
A fourth option would be to adjust the rate and/or exemption amount. As we know, lawmakers often can’t leave tax laws alone. As they propose new bills, it could be likely that a new set of exemptions and tax rates will emerge. For example, the Project 2025 proposal would promote a tax rate no higher than 20% with the same exemption. However, many Republican lawmakers are seeking a higher exemption.
An expensive fifth option would be to substantially lower the exemption and/or raise the rate. Bills already exist that would increase spending and use the revenue generated from the Estate tax to pay for them. One such bill would be the American Housing and Economic Mobility Act sponsored by Elizabeth Warren. These plans would propose dropping the exemption to closer to $3 million with tax rates ranging up to 75% for larger estates.
A controversial sixth option would be to repeal the Estate tax. A bill called the Death Tax Repeal Act already exists. It would eliminate the Estate tax and Generation-Skipping tax. Per the article, this bill draws strong support from the GOP in the House and Senate.
As these changes become clearer over the next few months or years, we all need to be prepared to adjust our plans accordingly. If you don’t have a plan or worry your plan isn’t sufficient, LeConte Wealth would appreciate the opportunity to discuss your estate and any questions you have.
