Guide to Maximizing Wealth Transfer Before Tax Changes

Key Takeaways:

Act Before 2026: The lifetime giving exemption of $13.61 million per individual ends in 2025. Act quickly to avoid the exemption dropping to $6.40 million and save substantial estate taxes.
Favorable Market Conditions: The current market downturn is ideal for gifting. Transfer assets now while values are low to maximize appreciation for recipients.
GST Tax Considerations: Be cautious of GST tax when gifting to grandchildren. Gift and GST tax exemptions start similarly but are used differently.
Customized Strategies Needed: Effective wealth transfer requires personalized strategies. Use techniques like irrevocable trusts and promissory notes, each with specific risks and benefits.
Proactive Planning Essential: Act now to benefit from favorable tax conditions and market opportunities. Professional advisors can help balance wealth retention for lifestyle with tax-efficient estate transfer.

Why 2024 is the Ideal Year for Estate Planning

It may seem that there will always be time to address estate planning. However, a unique opportunity to maximize the amount of wealth that can be tax-efficiently passed to heirs will expire at the end of 2025.

Furthermore, legislation could curb lifetime exemption limits even sooner. The opportunity is even more pressing because the current market downturn represents an especially advantageous time to optimize your taxable estate before markets eventually recover.

Here’s why 2024 is the ideal year to prioritize your wealth transfer plans.

Current Tax Laws Double Lifetime Giving Exemption

For high net worth individuals and their families, estate taxes can represent one of their largest tax liabilities. IRS rules allow certain amounts of an estate to be transferred free of taxes to family and friends, on an annual basis (the limit is $18,000 per person in 2024) and grant each taxpayer a lifetime exemption. Beginning in 2010, that lifetime exemption was $5 million per person indexed for inflation. The Tax Cuts and Jobs Act (TCJA) roughly doubled the giving limit, raising the lifetime exemption in 2024 to $13.61 million for individuals and $27.22 million for married couples.

The caveat—and it’s a big one—is that those expanded exclusion amounts expire at the end of 2025, with lifetime exemption totals reverting to an estimated $6.40 million per person. (Figure based on estimate of $5 million exemption in 2010 indexed for inflation through 2025.)Individuals and families seeking to lower their taxable estate may not see such a generous opportunity from the government again, so it’s critical to develop giving plans and put them into motion before it’s too late.

Gifting in a Bear Market Is Like Buying Low

Recent stock and bond market selloffs may make you think that now is a risky time to consider giving away a large portion of your estate. But for those in a position to take full advantage of the lifetime exemption, doing nothing could result in burning up much more in potential tax savings than any recent market losses.

In fact, initiating a giving program during a bear market has the possibility to increase the value of your gifts to future generations. When transferring common stock, for example, you can gift more shares when values are down, potentially providing a larger base of appreciation for the recipient. A downturn means as a donor, you could be able to transfer a greater portion of your wealth out of your estate.

Transferring the maximum amount allowed on your terms and timetable not only removes those assets and their potential appreciation from your estate, but it can also add meaning to the gifts by allowing you to see your children and grandchildren enjoy those assets during your lifetime.

Value of Gifting Today vs. Gifting in the Future

Failure to utilize the full expanded exclusion amount of $13.61 million per individual prior to its lapse at the end of 2025 may result in the unused amount being subject to gift or estate tax.

Example assumes each client here is a married couple	Couple 1	Couple 2
Current value of the estate	$50,000,000	$50,000,000
Gifts over next three years (using full exemption available)	$0	$27,220,000
Value left in the estate at the end of 2025	$50,000,000	$22,780,000
Lifetime exemption available after sunset (2026 and beyond)	$6,400,000	$0
Gross estate tax due (assume estate tax rate of 40%)	$17,440,000	$9,112,000

Key takeaway: An additional $8.33 million is paid in estate taxes by the couple who failed to utilize the expanded exclusion amount before it expires in 2025.

A Note of Caution

The generation skipping transfer (GST) tax exemption may also come into play if gifts are given to grandchildren. Gifts to grandchildren and subsequent generations have GST tax considerations. The gift tax exemption and the GST tax exemption start off the same (at $13.61M per individual) but can, and often, get used at different rates. If you have never used your gift tax exemption or GST tax exemption, you should be fine. However, you must be careful as a gift can result in both gift tax and GST tax being imposed on that gift.

Customize Your Wealth Transfer Strategies

Effective wealth transfer can be accomplished in several ways and should be customized to your personal circumstances. Your tax advisor can explain the pros and cons of various gifting options to ensure you receive the full estate tax benefits while retaining a measure of flexibility and access to certain assets if needed. A professional tax advisor can help you prioritize the types of assets to be gifted, such as cash, investments, or business interests.

Various techniques, including using irrevocable trusts and grantor retained annuity trusts (GRATs), can be employed to limit estate taxes when the wealth owner dies. Such trusts are established as a method of transferring wealth out of the owner’s estate for the benefit of family members (e.g., children, grandchildren, etc.). It is important to note that trusts have specific risks and challenges that must be understood before executing transfers of significant wealth. Qualified estate planning advisors also can help identify alternative gifting options, such as promissory notes and intrafamily loans, that may avoid some of the pitfalls of trusts.

When considering how much wealth should be transferred for the benefit of your heirs, thoughtful consideration should be given to how much wealth you should retain in your estate to maintain your lifestyle. Difficult decisions must be made during the estate planning process that weigh current cash flow needs with estate tax savings and preservation of family legacy. A qualified estate planning professional can model various scenarios to help you determine the amount of gifting that is right for you.

Today's tax savings opportunities may not be available tomorrow

As the clock steadily marches towards 2025, the urgency to act on your estate planning cannot be overstated. The current tax laws present a fleeting opportunity for affluent individuals and families to transfer a substantial portion of their wealth to their heirs with significant tax advantages. The chance to utilize the doubled lifetime giving exemption amounts is an unprecedented opportunity that is set to expire at the end of 2025, with the potential for legislation to further reduce these limits even sooner.

The current economic climate, characterized by a bear market, further underscores the timeliness of acting now. By transferring assets during this downturn, you not only maximize the tax efficiency of your gifts but also set the stage for potentially greater appreciation in your heirs’ hands. This strategic timing allows for a more impactful transfer of wealth, aligning with the principle of ‘buying low’ to offer more to your loved ones.

LBMC Wealth Advisors stands ready to assist you in navigating these complex waters. Let’s seize this moment to craft a legacy that reflects your vision and values.

David Frederick, J.D., LL.M. is a Senior Manager of High-Net-Worth Taxes and Planning at LBMC, PC. David is an attorney by background and his practice at LBMC is focused on advising high net worth individuals on matters of estate planning, business succession planning, and tax mitigation. He can be reached at david.frederick@lbmc.com or 615-690-1931.

LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.

A Strategic Guide to Maximizing Wealth Transfer Before Tax Changes: Why 2024 is the Ideal Year for Estate Planning

Contact LBMC Wealth Advisors now to start shaping your estate’s future before the opportunity slips away with the changing tides of legislation and the economy.

Why 2024 is the Ideal Year for Estate Planning

Current Tax Laws Double Lifetime Giving Exemption

Gifting in a Bear Market Is Like Buying Low

Value of Gifting Today vs. Gifting in the Future

Customize Your Wealth Transfer Strategies

Today's tax savings opportunities may not be available tomorrow

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