Navigating estate planning can be challenging, especially when it comes to understanding complex tax regulations and saving opportunities. One critical aspect that demands attention right now is the unified credit against estate taxes, also known as the lifetime gift and estate tax exemption, which determines how much of your estate can be transferred tax-free.
With significant changes on the horizon, now is the time to review your strategy and make the most of current opportunities.
What Is the Unified Credit?
The unified credit is the total amount that an individual can transfer tax-free during their lifetime or at death through gifts or estate transfers. It unifies both the gift tax and estate tax exclusions, meaning that any gifts you make during your lifetime reduce the amount of your estate exposed to future taxes.
As of 2024, the unified credit allows for an exemption of up to $13.61 million per individual (or $27.22 million for married couples). Initially established under the Tax Cuts and Jobs Act (TCJA) of 2017, this exemption provided an unprecedented opportunity for wealth transfer and estate planning, allowing individuals and families to pass on allowing individuals to pass on greater portions of their wealth tax-free. However, these provisions were designed to be temporary and are set to expire at the end of 2025.
The 2026 Sunset
The estate and gift tax exemption is set to revert to its pre-2018 level on January 1, 2026. This would roughly halve the exclusion amount to around $6 million per individual. This change is significant for those who have large estates or are planning substantial gifts. If you fall into this category, acting before the sunset could provide significant tax-saving opportunities.
For example, letโs say an unmarried individual has an estate valued at $16 million. If they gift the full 2024 exemption of $13.61 million, the remaining taxable estate in 2026 would be approximately $2.39 million. With an estate tax rate of around 40%, the potential tax liability would be roughly $946,000.
However, if no gifts were made before the 2026 sunset and the exemption reverts to about $6 million, the taxable portion of the $16 million estate would be $10 million. This could result in an estimated tax liability of $4 million, a significant increase compared to the pre-2026 gifting scenario.
Important note: The Internal Revenue Service (IRS) has already confirmed that gifts made under the current exemption amounts will not be retroactively taxed once the exemption decreases. That means gifts made before 2026 will retain their tax-free status, offering a unique opportunity to lock in todayโs higher exemption.
Lifetime Planning Strategies
Outright Gifting
Outright gifts provide immediate tax benefits and can be a straightforward way to transfer wealth to heirs. Additionally, annual gift tax exclusions allow you to give up to $18,000 per recipient (as of 2024) without using any portion of your lifetime exemption. Leveraging these annual gifts can maximize the transfer of wealth over time while preserving more of your unified credit for larger gifts.
Trust Structures
Trusts are often the preferred method, as they effectively remove assets from your estate, ensure theyโre managed according to your wishes, and protect beneficiaries from creditors. Common trust options include:
Spousal Lifetime Access Trusts (SLATs): SLATs enable one spouse to place assets in an irrevocable trust for the benefit of the other spouse. This strategy removes the assets from the taxable estate while allowing indirect access to trust income if needed.
Dynasty Trusts: These long-term trusts are designed to hold and manage assets for multiple generations, allowing wealth to be passed down while minimizing estate taxes and providing protection for beneficiaries.
How We Can Help
The unified credit against estate tax is a complex but critical element of effective financial planning, and with the 2026 sunset fast approaching, there is a limited window to act. Our team at Ironwood Wealth Management is here to help you evaluate your options and create a comprehensive estate plan that maximizes your benefits while minimizing tax liabilities.
