Considering the impact that taxes will have on your estate is an important part of creating a comprehensive estate plan. For some people, federal gift and estate taxes threaten to considerably diminish the value of the estate passed down to loved ones, making tax avoidance an even more crucial estate planning consideration. If you are among the people who need to factor in the impact of federal gift and estate taxes, the Los Angeles attorneys at Schomer Estate & Wealth Advisors remind you that now is the time to plan for the lifetime exemption rollback.
Understanding Federal Gift and Estate Taxes
Amounting to a tax on the transfer of wealth, the federal gift and estate tax is levied after the death of a taxpayer and collected from his/her estate during the legal process known as probate. The tax is levied on the combined value of all qualifying gifts (almost all gifts are considered “qualifying” gifts) made during a taxpayer’s lifetime coupled with the value of assets owned by the taxpayer at the time of death.
For many years, the federal gift and estate tax rate fluctuated from year to year, or administration to administration. The American Taxpayer Relief Act of 2012 (ATRA), however, permanently set the rate at 40 percent. To understand the potential impact the federal gift and estate tax could have on an estate, imagine that you made gifts valued at $10 million during your lifetime and left behind an estate valued at another $10 million. Your estate would owe the federal government $8 million in federal gift and estate taxes.
Understanding the Lifetime Exemption
The good news is that there has also been a “lifetime exemption” that taxpayer’s can take advantage of for many years that effectively exempts some of your estate from federal gift and tax liability. The lifetime exemption amount, however, also changed on a regular basis until the passage of ATRA which set the limit at $5 million, to be adjusted annually for inflation. The Tax Cuts and Jobs Act (TCJA) was then passed in 2018 which significantly, but temporarily, increased the lifetime exemption amount.
For 2024, the individual lifetime exemption amount is $13.61 million, meaning a married couple can pass down $27.22 million without having to pay federal gift and estate taxes on the transfer of wealth. Our $20 million estate from above would only pay gift and estate taxes on $6.39 million after making use of the lifetime exemption, reducing the tax liability from $8 million to $2,556,000, saving the estate over $5 million.
Planning for the Lifetime Exemption Rollback
Taxpayers have taken advantage of the temporary boost in the TCJA lifetime exemption, but it is crucial to remember that this increase is not permanent. Without Congressional action, the provision that raised the lifetime exemption will expire on January 1, 2026. At that point, the exemption will revert to $5 million, adjusted for inflation between 2018 and 2026. For taxpayers who fail to plan for the rollback, their estates could take a substantial hit when it comes to federal gift and estate taxes.
How to Address the Lifetime Exemption Rollback
The impending rollback of the lifetime exemption limit highlights the importance of routine reviews of your estate plan. Now is the time to consult with your estate planning attorney to understand how this rollback will affect your estate plan. By proactively planning for this change, you can mitigate its adverse effects on your estate and ensure your financial affairs are in order.
Do You Need Help Planning for the Lifetime Exemption Rollback?
For more information, please join us for an upcoming FREE seminar. If you need help ensuring that your estate plan is prepared for the lifetime exemption increase to be rolled back, contact the experienced Los Angeles estate planning attorneys at Schomer Estate & Wealth Advisors by calling (310) 337-7696 to schedule an appointment.
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